|
Major
Accounting Policies
Principles
of Consolidation
The financial statements include the accounts of the
company and its subsidiaries. The equity method of accounting
is used for investment ownership ranging from 20 percent
to 50 percent. Investment ownership of less than 20
percent is accounted for on the cost method. All significant
intercompany transactions of consolidated subsidiaries
are eliminated. Certain 1998 and 1997 amounts have been
reclassified to conform with the 1999 presentation.
Use
of Estimates
The preparation of the financial statements of the company
requires management to make estimates and assumptions
that affect reported amounts. These estimates are based
on information available as of the date of the financial
statements. Therefore, actual results could differ from
those estimates.
Engineering
and Construction Contracts
The company recognizes engineering and construction
contract revenues using the percentage-of-completion
method, based primarily on contract costs incurred to
date compared with total estimated contract costs. Customer-furnished
materials, labor and equipment, and in certain cases
subcontractor materials, labor and equipment, are included
in revenues and cost of revenues when management believes
that the company is responsible for the ultimate acceptability
of the project. Contracts are segmented between types
of services, such as engineering and construction, and
accordingly, gross margin related to each activity is
recognized as those separate services are rendered.
Changes to total estimated contract costs or losses,
if any, are recognized in the period in which they are
determined. Revenues recognized in excess of amounts
billed are classified as current assets under contract
work in progress. Amounts billed to clients in excess
of revenues recognized to date are classified as current
liabilities under advance billings on contracts. The
company anticipates that substantially all incurred
costs associated with contract work in progress at October
31, 1999 will be billed and collected in 2000.
Depreciation,
Depletion and Amortization
Additions to property, plant and equipment are recorded
at cost. Assets other than mining properties and mineral
rights are depreciated principally using the straight-line
method over the following estimated useful lives: buildings
and improvements — three to 50 years and machinery
and equipment — two to 30 years. Mining properties
and mineral rights are depleted on the units-of-production
method. Leasehold improvements are amortized over the
lives of the respective leases. Goodwill is amortized
on the straight-line method over periods not longer
than 40 years.
Exploration,
Development and Reclamation
Coal exploration costs are expensed as incurred. Development
and acquisition costs of coal properties, when significant,
are capitalized in mining properties and depleted. The
company accrues for post-mining reclamation costs as
coal is mined. Reclamation of disturbed surface acreage
is performed as a normal part of the mining process.
Income
Taxes
Deferred tax assets and liabilities are recognized for
the expected future tax consequences of events that
have been recognized in the company’s financial
statements or tax returns.
Earnings
per Share
Basic earnings per share (EPS) is calculated by dividing
net earnings by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects
the assumed conversion of all dilutive securities, consisting
of employee stock options and restricted stock, and
equity forward contracts.
The impact of dilutive securities on the company’s
EPS calculation is as follows:
| Year
ended October 31, |
1999 |
1998 |
1997 |
|
Employee
stock options/restricted stock
Equity forward contract |
107,000
594,000 |
231,000
103,000 |
387,000
– |
|
|
701,000 |
334,000 |
387,000 |
|
|
Inventories
Inventories are stated at the lower of cost or market
using specific identification or the average cost method.
Inventories comprise:
| At
October 31, |
1999 |
1998 |
|
(in
thousands)
Equipment for sale/rental
Coal
Supplies and other |
$131,781
72,070
44,267 |
$194,179
52,628
51,838 |
|
|
$248,118 |
$198,645 |
|
|
Internal
Use Software
Effective for fiscal year 1999, the company adopted
the American Institute of Certified Public Accountants’
Statement of Position (SOP) 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained
for Internal Use.” The statement requires capitalization
of certain costs incurred in the development of internal-use
software, including external direct material and service
costs, employee payroll and payroll-related costs. Prior
to the adoption of SOP 98-1, the company capitalized
only purchased software which was ready for service;
all other costs were expensed as incurred. The adoption
of this statement did not have a material effect on
the company’s financial statements.
Foreign
Currency
The company uses forward exchange contracts to hedge
certain foreign currency transactions entered into in
the ordinary course of business. The company does not
engage in currency speculation. The company’s forward
exchange contracts do not subject the company to significant
risk from exchange rate movements because gains and
losses on such contracts offset losses and gains, respectively,
on the assets, liabilities or transactions being hedged.
Accordingly, the unrealized gains and losses are deferred
and included in the measurement of the related foreign
currency transaction. At October 31, 1999, the company
had approximately $124 million of foreign exchange contracts
outstanding relating to lease commitments and contract
obligations. The forward exchange contracts generally
require the company to exchange U.S. dollars for foreign
currencies at maturity, at rates agreed to at inception
of the contracts. If the counterparties to the exchange
contracts (AA rated banks) do not fulfill their obligations
to deliver the contracted currencies, the company could
be at risk for any currency related fluctuations. The
amount of any gain or loss on these contracts in 1999,
1998 and 1997 was immaterial. The contracts are of varying
duration, none of which extend beyond December 2000.
The company limits exposure to foreign currency fluctuations
in most of its engineering and construction contracts
through provisions that require client payments in U.S.
dollars or other currencies corresponding to the currency
in which costs are incurred. As a result, the company
generally does not need to hedge foreign currency cash
flows for contract work performed. The functional currency
of all significant foreign operations is the local currency.
In
June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
133, “Accounting for Derivative Instruments and
Hedging Activities” (SFAS No. 133). SFAS No. 133
establishes new standards for recording derivatives
in interim and annual financial statements. This statement,
as amended, is effective for the company’s fiscal
year 2001. Management does not anticipate that the adoption
of the new statement will have a significant impact
on the results of operations or the financial position
of the company.
Concentrations
of Credit Risk
The majority of accounts receivable and all contract
work in progress are from engineering and construction
clients in various industries and locations throughout
the world. Most contracts require payments as the projects
progress or in certain cases advance payments. The company
generally does not require collateral, but in most cases
can place liens against the property, plant or equipment
constructed or terminate the contract if a material
default occurs. Accounts receivable from customers of
the company’s coal operations are primarily concentrated
in the steel and utility industries. The company maintains
adequate reserves for potential credit losses and such
losses have been minimal and within management’s
estimates.
Stock
Plans
The company accounts for stock-based compensation using
the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related Interpretations.
Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market
price of the company’s stock at the date of the
grant over the amount an employee must pay to acquire
the stock. Compensation cost for stock appreciation
rights and performance equity units is recorded based
on the quoted market price of the company’s stock
at the end of the period.
Comprehensive
Income
Effective November 1, 1998, the company adopted Statement
of Financial Accounting Standards No. 130, “Reporting
Comprehensive Income,” which establishes standards
for the reporting and display of total comprehensive
income and its components in financial statements. The
adoption of this statement had no effect on the company’s
net earnings or total shareholders’ equity.
Total
comprehensive income represents the net change in shareholders’
equity during a period from sources other than transactions
with shareholders and as such, includes net earnings.
For the company, the only other component of total comprehensive
income is the change in the cumulative foreign currency
translation adjustments recorded in shareholders’
equity. Prior period financial statements have been
reclassified to conform with the provisions of the new
standard.
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Consolidated
Statement of Cash Flows
Securities with maturities of 90 days or less at the
date of purchase are classified as cash equivalents.
Securities with maturities beyond 90 days, when present,
are classified as marketable securities and are carried
at fair value. The changes in operating assets and liabilities
as shown in the Consolidated Statement of Cash Flows
comprise:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
(in
thousands)
Decrease (increase) in:
--Accounts and notes
receivable
--Contract work in
progress
--Inventories
--Other current assets
(Decrease) increase in:
--Accounts payable
--Advance billings
on contracts
--Accrued liabilities |
$ |
25,972
180,698
(49,473
(16,054
(173,345
18,557
(8,906 |
)
)
)
) |
$ |
(84,394
73,575
(23,197
(192
127,229
21,298
54,257 |
)
)
)
|
$ |
(113,454
(130,257
(40,303
(17,028
130,992
79,510
23,316 |
)
)
)
)
|
|
|
(Increase)
decrease in operating
--assets and liabilities |
$ |
(22,551 |
) |
$ |
168,576 |
|
$ |
(67,224 |
) |
|
|
|
Cash
paid during the year for:
Interest expense
Income tax payments, net
|
$
$ |
47,558
52,025 |
|
$
$ |
44,057
52,346 |
|
$
$ |
25,491
75,967 |
|
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Business
Acquisitions
The following summarizes major engineering and construction
related acquisitions completed during 1997. All of these
acquisitions were in the Fluor Global Services segment.
There were no major engineering and construction related
acquisitions in 1999 and 1998.
- ConSol
Group, a privately held U.S. company headquartered
in New Hampshire, that provides staffing personnel
in the fields of information technology and allied
health.
- J.W.
Burress, Inc., a privately held U.S. company headquartered
in Virginia, that provides product support services
and sells, rents and services new and used construction
and industrial machinery.
- SMA
Companies, privately held U.S. companies headquartered
in California and Georgia. These companies sell, rent
and service heavy construction and industrial equipment
and provide proprietary software to other equipment
distributors throughout the U.S.
These
businesses and other smaller acquisitions were purchased
for a total of $142 million. The fair value of assets
acquired, including working capital of $42 million and
goodwill of $67 million, was $196 million, and liabilities
assumed totaled $54 million.
In
1998, the company’s coal segment, through its Massey
Coal Company (“Massey”), acquired coal reserves
for an aggregate cost of $12 million. Massey purchased
two coal mining companies during 1997. The aggregate
purchase price was $39 million and included the fair
value of assets acquired, consisting of $55 million
of property, plant and equipment, and mining rights,
$13 million of working capital and other assets, net
of other liabilities assumed of $29 million. These acquisitions,
along with capital expenditures, have been directed
primarily towards acquiring additional coal reserves.
There were no coal related acquisitions in 1999.
All
of the above acquisitions have been accounted for under
the purchase method of accounting and their results
of operations have been included in the company’s
consolidated financial statements from the respective
acquisition dates. If these acquisitions had been made
at the beginning of the respective year acquired, pro
forma results of operations would not have differed
materially from actual results.
From
time to time, the company enters into investment arrangements,
including joint ventures, that are related to its engineering
and construction business. During 1997 through 1999,
the majority of these expenditures related to ongoing
investments in an equity fund that focuses on energy
related projects and a number of smaller, diversified
ventures.
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Business
Dispositions
On October 28, 1998, the company entered into an agreement
to sell its ownership interest in Fluor Daniel GTI,
Inc. (FD/GTI). Under terms of the agreement, the company
sold its 4,400,000 shares in FD/GTI for $8.25 per share,
or $36.3 million in cash, on December 3, 1998. The net
assets of FD/GTI were reflected on the 1998 consolidated
balance sheet at net realizable value and included $26.4
million in cash and cash equivalents. This transaction
did not have a material impact on the company’s
results of operations or financial position.
During
1997, the company completed the sale of ACQUION, a global
provider of supply chain management services, for $12
million in cash, resulting in a pretax gain of $7 million.
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Special
Provision and Cost Reduction Initiatives
In March 1999, the company announced a new strategic
direction, including a reorganization of the operating
units and administrative functions of its engineering
and construction segment. In connection with this reorganization,
the company recorded in the second quarter a special
provision of $136.5 million pre-tax to cover direct
and other reorganization related costs, primarily for
personnel, facilities and asset impairment adjustments.
Under
the reorganization plan, approximately 5,000 jobs are
expected to be eliminated. The provision includes amounts
for personnel costs for certain affected employees that
are entitled to receive severance benefits under established
severance policies or by government regulations. Additionally,
outplacement services may be provided on a limited basis
to some affected employees. The provision also reflects
amounts for asset impairment, primarily for property,
plant and equipment; intangible assets (goodwill); and
certain investments. The asset impairments were recorded
primarily because of the company’s decision to
exit certain non-strategic geographic locations and
businesses. The carrying values of impaired assets were
adjusted to their current market values based on estimated
sale proceeds, using either discounted cash flows or
contractual amounts. Lease termination costs were also
included in the special provision. The company anticipates
closing 15 non-strategic offices worldwide as well as
consolidating and downsizing other office locations.
The closure or ration-alization of these facilities
is expected to be substantially completed by the end
of fiscal year 2000.
As
of October 31, 1999, the company has reduced headcount
by approximately 5,000 employees and has closed 13 offices.
The company anticipates closing two additional offices
within the next six months. In October 1999, $19.3 million
of the special provision was reversed into earnings
as a result of lower than anticipated severance costs
for personnel reductions in certain overseas offices.
Both the actual number of employee terminations as well
as the cost per employee termination were lower than
originally estimated.
The
following table summarizes the status of the company’s
reorganization plan as of October 31, 1999:
|
Personnel
Costs |
|
Asset
Impairments |
|
Lease
Termination
Costs |
|
Other |
|
Total |
|
|
|
(in
thousands)
Special provision
Cash expenditures
Non-cash activities
Provision reversal |
$ |
72,200
(25,089
(2,576
(19,300 |
)
)
) |
$ |
48,800
(1,094
(24,360
— |
)
) |
$ |
14,500
(4,793
—
— |
)
|
$ |
1,000
(814
—
— |
) |
$ |
136,500
(31,790
(26,936
(19,300 |
)
)
) |
|
|
Balance
at October
--31, 1999 |
$ |
22,235 |
|
$ |
23,346 |
|
$ |
9,707 |
|
$ |
186 |
|
$ |
58,474 |
|
|
|
|
The
special provision liability as of October 31, 1999 is
included in other accrued liabilities. The liability
for personnel costs and asset impairments will be substantially
utilized by April 30, 2000. The liability associated
with abandoned lease space will be amortized as an offset
to lease expense over the remaining life of the respective
leases starting on the date of abandonment.
During
1997, the company recorded $25.4 million in charges
related to the implementation of certain cost reduction
initiatives. These charges provided for personnel and
facility related costs. As of October 31, 1999, substantially
all of these costs had been incurred.
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Income
Taxes
The income tax expense (benefit) included in the Consolidated
Statement of Earnings is as follows:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
(in
thousands)
Current:
--Federal
--Foreign
--State and local |
$ |
5,931
43,012
3,255 |
|
$ |
38,700
52,021
7,781 |
|
$ |
50,906
25,801
6,947 |
|
|
|
| Total
current |
|
52,198 |
|
|
98,502 |
|
|
83,654 |
|
|
|
|
Deferred:
--Federal
--Foreign
--State and local |
|
26,872
(2,641
5,037 |
) |
|
43,369
(19,295
4,706 |
) |
|
19,972
3,908
1,548 |
|
|
|
| Total
deferred |
|
29,268 |
|
|
28,780 |
|
|
25,428 |
|
|
|
| Total
income tax expense |
$ |
81,466 |
|
$ |
127,282 |
|
$ |
109,082 |
|
|
|
|
A
reconciliation of U.S. statutory federal income tax
expense to the company’s income tax expense on
earnings is as follows:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
(in
thousands)
U.S. statutory federal tax expense
Increase (decrease) in taxes resulting from:
--Items without tax
effect, net
--State and local income
taxes
--Depletion
--Effect of non-U.S.
tax rates
--Other, net |
$ |
64,979
26,158
5,048
(9,625
(396
(4,698 |
)
)
) |
$ |
126,919
888
7,868
(12,273
3,433
447 |
) |
$ |
89,344
13,307
5,337
(10,051
10,620
525 |
) |
|
|
| Total
income tax expense |
$ |
81,466 |
|
$ |
127,282 |
|
$ |
109,082 |
|
|
|
|
Deferred
taxes reflect the tax effects of differences between
the amounts recorded as assets and liabilities for
financial reporting purposes and the amounts recorded
for income tax purposes. The tax effects of significant
temporary differences giving rise to deferred tax
assets and liabilities are as follows:
| At
October 31, |
|
1999 |
|
|
1998 |
|
|
|
(in
thousands)
Deferred tax assets:
--Accrued liabilities
not currently deductible
--Alternative minimum
tax credit carryforwards
--Net operating loss
carryforwards of non-U.S. companies
--Translation adjustments
--Tax basis of building
in excess of book basis
--Net operating loss
carryforwards of acquired companies
--Other |
$ |
249,987
44,287
29,133
23,955
16,408
6,503
71,926 |
|
$ |
224,319
32,505
22,441
19,045
16,187
7,177
73,599 |
|
|
|
Total
deferred tax assets
Valuation allowance for deferred tax assets |
|
442,199
(127,085 |
) |
|
395,273
(100,007 |
) |
|
|
| Deferred
tax assets, net |
|
315,114 |
|
|
295,266 |
|
|
|
Deferred
tax liabilities:
--Book basis of property,
equipment and
----other capital costs
in excess of tax basis
--Tax on unremitted
non-U.S. earnings
--Other |
|
(294,628
(16,361
(60,833 |
)
)
) |
|
(254,008
(15,806
(49,812 |
)
)
) |
|
|
| Total
deferred tax liabilities |
|
(371,822 |
) |
|
(319,626 |
) |
|
|
| Net
deferred tax liabilities |
$ |
(56,708 |
) |
$ |
(24,360 |
) |
|
|
|
The
company has net operating loss carryforwards from
non-U.S. operations of approximately $80 million which
can be carried forward indefinitely until fully utilized.
These losses primarily relate to the company’s
operations in Australia, Chile, Germany and the United
Kingdom. Deferred tax assets established for these
losses aggregate $29 million and $22 million at October
31, 1999 and 1998, respectively.
In
1997, the company acquired the SMA Companies which
had net operating loss carryforwards of approximately
$47 million. The company has utilized approximately
$5 million of the loss carryforwards, and made an
election in its 1998 consolidated federal tax return
to waive approximately $23 million of losses which
otherwise would have expired without future tax benefit.
The remaining loss carryforwards of approximately
$19 million expire in the years 2004 through 2008.
The utilization of such loss carryforwards is subject
to stringent limitations under the Internal Revenue
Code. Deferred tax assets established for these losses
aggregate $7 million for both 1999 and 1998.
Substantially
all of the company’s alternative minimum tax
credits are associated with the coal business operated
by Massey. These credits can be carried forward indefinitely
until fully utilized.
The
company maintains a valuation allowance to reduce
certain deferred tax assets to amounts that are more
likely than not to be realized. This allowance primarily
relates to the deferred tax assets established for
the special provision, net operating loss carryforwards
and alternative minimum tax credits. In 1999, increases
in the valuation allowance are principally the result
of the company’s special provision which did
not receive full tax benefit. Any reductions in the
allowance resulting from realization of the loss carryforwards
of acquired companies will result in a reduction of
goodwill.
Residual
income taxes of approximately $8 million have not
been provided on approximately $20 million of undistributed
earnings of certain foreign subsidiaries at October
31, 1999, because the company intends to keep those
earnings reinvested indefinitely.
United
States and foreign earnings before taxes are as follows:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
(in
thousands)
United States
Foreign |
$ |
168,698
16,955 |
|
$ |
240,645
121,981 |
|
$ |
231,921
23,348 |
|
|
|
| Total |
$ |
185,653 |
|
$ |
362,626 |
|
$ |
255,269 |
|
|
|
|
Retirement
Benefits
The company sponsors contributory and non-contributory
defined contribution retirement and defined benefit
pension plans for eligible employees. Contributions
to defined contribution retirement plans are based
on a percentage of the employee’s compensation.
Expense recognized for these plans of approximately
$56 million in 1999, $79 million in 1998, and $84
million in 1997, is primarily related to domestic
engineering and construction operations. Effective
January 1, 1999, the company replaced its domestic
defined contribution retirement plan with a defined
benefit cash balance plan. Contributions to defined
benefit pension plans are generally at the minimum
annual amount required by applicable regulations.
Payments to retired employees under these plans are
generally based upon length of service, age and/or
a percentage of qualifying compensation. The defined
benefit pension plans are primarily related to international
engineering and construction operations, U.S. craft
employees and coal operations.
Net
periodic pension expense (income) for defined benefit
pension plans includes the following components:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
(in
thousands)
Service cost
Interest cost
Expected return on assets
Amortization of transition asset
Amortization of prior service cost
Recognized net actuarial loss (gain) |
$ |
35,370
25,088
(49,032
(2,132
337
58 |
)
) |
$ |
15,792
24,220
(48,236
(2,196
355
(1,444 |
)
)
) |
$ |
15,301
23,743
(44,334
(2,296
347
(1,288 |
)
)
) |
|
|
| Net
periodic pension expense (income) |
$ |
9,689 |
|
$ |
(11,509 |
) |
$ |
(8,527 |
) |
|
|
|
The
ranges of assumptions indicated below cover defined
benefit pension plans in Australia, Germany, the United
Kingdom, The Netherlands and the United States. These
assumptions are as of each respective fiscal year-end
based on the then current economic environment in
each host country.
| At
October 31, |
|
1999 |
|
|
1998 |
|
|
|
Discount rates
Rates of increase in compensation levels
Expected long-term rates of return on assets |
|
6.0-7.75
3.5-4.00
5.0-9.50 |
%
%
% |
|
5.0-6.75
2.5-4.00
5.0-9.50 |
%
%
% |
The
following table sets forth the change in benefit obligation,
plan assets and funded status of the company’s
defined benefit pension plans:
| At
October 31, |
|
1999 |
|
|
1998 |
|
|
|
(in
thousands)
Change in pension benefit obligation
--Benefit obligation
at beginning of year
--Service cost
--Interest cost
--Employee contributions
--Currency translation
--Actuarial (gain)
loss
--Benefits paid |
$ |
438,866
35,370
25,088
1,626
(19,068
(22,808
(27,319 |
)
)
) |
$ |
358,539
15,792
24,220
1,775
12,454
52,498
(26,412 |
) |
|
|
| Benefit
obligations at end of year |
$ |
431,755 |
|
$ |
438,866 |
|
|
|
|
Change
in plan assets
--Fair value at beginning
of year
--Actual return on
plan assets
--Company contributions
--Employee contributions
--Currency translation
--Benefits paid
--Plan amendments |
$ |
576,019
103,938
5,646
1,626
(17,154
(27,319
(3,945 |
)
)
) |
$ |
539,814
42,324
4,711
1,775
13,999
(26,412
(192 |
)
) |
|
|
| Fair
value at end of year |
$ |
638,811 |
|
$ |
576,019 |
|
|
|
|
Funded
status
Unrecognized net actuaria (gain) loss
Unrecognized prior service cost
Unrecognized net asset |
$ |
207,056
(61,372
170
(8,002 |
)
) |
$ |
137,153
16,579
601
(11,737 |
) |
|
|
| Pension
assets |
$ |
137,852 |
|
$ |
142,596 |
|
|
|
|
| Amounts
shown above at October 31, 1999 and 1998 exclude
the projected benefit obligation of approximately
$101 million and $113 million, respectively, and
an equal amount of associated plan assets relating
to discontinued operations. |
|
Massey
participates in multiemployer defined benefit pension
plans for its union employees. Pension expense was less
than $1 million in each of the years ended October 31,
1999, 1998 and 1997. Under the Coal Industry Retiree
Health Benefits Act of 1992, Massey is required to fund
medical and death benefits of certain beneficiaries.
Massey’s obligation under the Act is estimated
to aggregate approximately $56 million at October 31,
1999, which will be recognized as expense as payments
are assessed. The expense recorded for such benefits
was $4 million in 1999 and 1998 and $7 million in 1997.
In
addition to the company’s defined benefit pension
plans, the company and certain of its subsidiaries
provide health care and life insurance benefits for
certain retired employees. The health care and life
insurance plans are generally contributory, with retiree
contributions adjusted annually. Service costs are
accrued currently. The accumulated postretirement
benefit obligation at October 31, 1999 and 1998 was
determined in accordance with the current terms of
the company’s health care plans, together with
relevant actuarial assumptions and health care cost
trend rates projected at annual rates ranging from
7.8 percent in 2000 down to 5 percent in 2004 and
beyond. The effect of a one percent annual increase
in these assumed cost trend rates would increase the
accumulated postretirement benefit obligation and
the aggregate of the annual service and interest costs
by approximately $11.8 million and $1.7 million, respectively.
The effect of a one percent annual decrease in these
assumed cost trend rates would decrease the accumulated
postretirement benefit obligation and the aggregate
of the annual service and interest costs by approximately
$8.9 million and $2.5 million, respectively.
Net
periodic postretirement benefit cost includes the
following components:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
(in
thousands)
Service cost
Interest cost
Expected return on assets
Amortization of prior service cost
Recognized net actuarial (gain) loss |
$ |
3,850
5,724
—
140
(458 |
) |
$ |
3,506
5,820
—
124
(595 |
) |
$ |
3,107
6,338
—
—
142 |
|
| Net
periodic postretirement benefit cost |
$ |
9,256 |
|
$ |
8,855 |
|
$ |
9,587 |
|
|
The
following table sets forth the change in benefit obligation
of the company’s postretirement benefit plans:
| At
October 31, |
|
1999 |
|
|
1998 |
|
|
|
(in
thousands)
Change in postretirement benefit obligation
--Benefit obligation
at beginning of year
--Service cost
--Interest cost
--Employee contributions
--Actuarial (gain)
loss
--Benefits paid |
$ |
93,975
3,850
5,724
270
(15,303
(4,655 |
)
) |
$ |
86,187
3,506
5,820
269
2,473
(4,280 |
) |
|
|
| Benefit
obligations at end of year |
$ |
83,861 |
|
$ |
93,975 |
|
|
|
|
Funded
status
Unrecognized net actuarial (gain) loss
Unrecognized prior service cost |
$ |
(83,861
(11,650
1,776 |
)
) |
$ |
(93,975
3,195
1,916 |
) |
|
|
| Accrued
postretirement benefit obligation |
$ |
(93,735 |
) |
$ |
(88,864 |
) |
|
|
|
The
discount rate used in determining the postretirement
benefit obligation was 7.75 percent and 6.75 percent
at October 31, 1999 and 1998, respectively.
The
preceding information does not include amounts related
to benefit plans applicable to employees associated
with certain contracts with the U.S. Department of
Energy because the company is not responsible for
the current or future funded status of these plans.
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Fair
Value of Financial Instruments
The estimated fair value of the company’s financial
instruments are as follows:
| |
1999 |
|
1998 |
|
| Year
ended October 31, |
Carrying
Amount |
|
Fair
Value |
|
Carrying
Amount |
|
Fair
Value |
|
|
(in thousands)
Assets:
Cash and cash equivalents
Notes receivable including
--noncurrent portion
Long-term investmentsLiabilities:
Commercial paper, loan notes
--and notes payable
Long-term debt including current portion
Other noncurrent financial liabilities
Off-balance sheet financial
--instruments:
Forward contracts to purchase
--common stock
Foreign currency contract
--obligations
Letters of credit
Lines of credit |
$ |
209,614
47,444
60,609
247,911
317,555
9,789
—
—
—
—
|
|
$ |
209,614
54,387
72,667
247,911
312,580
9,789
(21,170
(1,311
543
965
|
)
)
|
$ |
340,544
41,854
59,734
430,508
300,604
8,486
—
—
—
—
|
|
$ |
340,544
48,953
76,064
430,508
319,654
8,486
(18,793
1,964
720
1,077
|
)
|
Fair
values were determined as follows:
The
carrying amounts of cash and cash equivalents, short-term
notes receivable, commercial paper, loan notes and
notes payable approximate fair value because of the
short-term maturity of these instruments.
Long-term
investments are based on quoted market prices for
these or similar instruments. Long-term notes receivable
are estimated by discounting future cash flows using
the current rates at which similar loans would be
made to borrowers with similar credit ratings.
The
fair value of long-term debt, including current portion,
is estimated based on quoted market prices for the
same or similar issues or on the current rates offered
to the company for debt of the same maturities.
Other
noncurrent financial liabilities consist primarily
of deferred payments, for which cost approximates
fair value.
Forward
contracts to purchase common stock are based on the
estimated cost to terminate or settle the obligation.
Foreign
currency contract obligations are estimated by obtaining
quotes from brokers.
Letters
of credit and lines of credit amounts are based on
fees currently charged for similar agreements or on
the estimated cost to terminate or settle the obligations.
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Financing
Arrangements
The company has unsecured committed revolving short-
and long-term lines of credit with banks from which
it may borrow for general corporate purposes up to
a maximum of $600 million. Commitment and facility
fees are paid on these lines. In addition, the company
has $1.0 billion in short-term uncommitted lines of
credit to support letters of credit, foreign currency
contracts and loan notes. Borrowings under both committed
and uncommitted lines of credit bear interest at prime
or rates based on the London Interbank Offered Rate
(“LIBOR”), domestic certificates of deposit
or other rates which are mutually acceptable to the
banks and the company. At October 31, 1999, no amounts
were outstanding under the committed lines of credit.
As of that date, $235 million of the short-term uncommitted
lines of credit were used to support undrawn letters
of credit and foreign currency contracts issued in
the ordinary course of business and $16 million were
used for outstanding loan notes.
The
company had $114 million and $245 million in unsecured
commercial paper outstanding at October 31, 1999 and
1998, respectively. The commercial paper was issued
at a discount with a weighted-average effective interest
rate of 5.9 percent at October 31, 1999 and 5.3 percent
at October 31, 1998.
At
October 31, 1999 the company had a $113 million note
payable to an affiliated entity. The note is due on
demand and bears interest at the rate of 5.41 percent
as of October 31, 1999.
Long-term
debt comprises:
| At
October 31, |
|
1999 |
|
|
1998 |
|
|
|
(in
thousands)
6.95% Senior Notes due March 1, 2007
Other bonds and notes |
$ |
300,000
17,555 |
|
$ |
300,000
604 |
|
|
|
Less: Current portion |
|
317,555
— |
|
|
300,604
176 |
|
|
|
| Long-term
debt due after one year |
$ |
317,555 |
|
$ |
300,428 |
|
|
|
|
In
March 1997, the company issued $300 million of 6.95%
Senior Notes (the Notes) due March 1, 2007 with interest
payable semiannually on March 1 and September 1 of
each year, commencing September 1, 1997. The Notes
were sold at a discount for an aggregate price of
$296.7 million. The Notes are redeemable, in whole
or in part, at the option of the company at any time
at a redemption price equal to the greater of (i)
100 percent of the principal amount of the Notes or
(ii) as determined by a Quotation Agent as defined
in the offering prospectus.
Included
in other bonds and notes are $18 million of 5.625%
municipal bonds issued in July 1999. The bonds are
due June 1, 2019 with interest payable semiannually
on June 1 and December 1 of each year, commencing
December 1, 1999. The bonds are redeemable, in whole
or in part, at the option of the company at a redemption
price ranging from 100 percent to 102 percent of the
principal amount of the bonds on or after June 1,
2009. In addition, the bonds are subject to other
redemption clauses, at the option of the holder, should
certain events occur, as defined in the offering prospectus.
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Other
Noncurrent Liabilities
The company maintains appropriate levels of insurance
for business risks. Insurance coverages contain various
deductible amounts for which the company provides
accruals based on the aggregate of the liability for
reported claims and an actuarially determined estimated
liability for claims incurred but not reported. Other
noncurrent liabilities include $61 million and $64
million at October 31, 1999 and 1998, respectively,
relating to these liabilities.
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Stock
Plans
The company’s executive stock plans, approved
by the shareholders, provide for grants of nonqualified
or incentive stock options, restricted stock awards
and stock appreciation rights (“SARS”).
All executive stock plans are administered by the
Organization and Compensation Committee of the Board
of Directors (“Committee”) comprised of
outside directors, none of whom are eligible to participate
in the plans. Option grant prices are determined by
the Committee and are established at the fair value
of the company’s common stock at the date of
grant. Options and SARS normally extend for 10 years
and become exercisable over a vesting period determined
by the Committee, which can include accelerated vesting
for achievement of performance or stock price objectives.
During 1998, the company issued 1,696,420 options
and 1,502,910 SARS that vest over three to four year
periods and expire in five years. The majority of
these awards have accelerated vesting provisions based
on the price of the company’s stock. Additionally,
58,000 and 189,075 nonqualified stock options were
issued during 1999 and 1998, respectively, and 10,925
incentive stock options were issued during 1998, with
20 percent to 25 percent vesting upon issuance and
the remaining awards vesting in installments of 20
percent to 25 percent per year commencing one year
from the date of grant.
Restricted
stock awards issued under the plans provide that shares
awarded may not be sold or otherwise transferred until
restrictions have lapsed or performance objectives
have been attained as established by the Committee.
Upon termination of employment, shares upon which
restrictions have not lapsed must be returned to the
company. Restricted stock issued under the plans totaled
197,257 shares, 4,500 shares and 186,390 shares in
1999, 1998 and 1997, respectively.
As
permitted by Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation”
(SFAS No. 123), the company has elected to continue
following the guidance of APB Opinion No. 25, “Accounting
for Stock Issued to Employees,” for measurement
and recognition of stock-based transactions with employees.
Recorded compensation cost for these plans totaled
$8 million in 1999. During 1998, the company recognized
a net credit of $9 million for performance-based stock
plans. This amount includes $10 million of expenses
accrued in prior years which were reversed in 1998
as a result of not achieving prescribed performance
targets. Compensation cost recognized for such plans
totaled less than $1 million in 1997. Under APB Opinion
No. 25, no compensation cost is recognized for the
option plans where vesting provisions are based only
on the passage of time. Had the company recorded compensation
expense using the accounting method recommended by
SFAS No. 123, net earnings and diluted earnings per
share would have been reduced to the pro forma amounts
as follows:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
(in
thousands, except per share amounts)
Net earnings
--As Reported
--Pro Forma
Diluted earnings per share
--As Reported
--Pro Forma |
$
$ |
104,187
95,297
1.37
1.26 |
|
$
$ |
235,344
218,958
2.97
2.77 |
|
$
$ |
146,187
143,663
1.75
1.72 |
The
fair value of each option grant is estimated on the
date of grant by using the Black-Scholes option-pricing
model. The following weighted-average assumptions
were used for new grants:
| Year
ended October 31, |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
Expected
option lives (years)
Risk-free interest rates
Expected dividend yield
Expected volatility |
|
6
4.51
1.38
33.76 |
%
%
% |
|
5
5.83
1.19
29.85 |
%
%
% |
|
6
6.30
1.15
24.58 |
%
%
% |
The
weighted-average fair value of options granted during
1999, 1998 and 1997 was $15 $12 and $17, respectively.
The
following table summarizes stock option activity:
|
Stock
Options |
|
|
Weighted
Average
Exercise
Price
Per Share |
|
| Outstanding
at October 31, 1996 |
4,339,378 |
|
$ |
50 |
|
Granted
Expired or canceled
Exercised |
114,060
(117,404
(414,731 |
)
) |
|
61
53
39 |
|
| Outstanding
at October 31, 1997 |
3,921,303 |
|
|
51 |
|
Granted
Expired or canceled
Exercised |
1,898,420
(844,664
(267,602 |
)
) |
|
36
47
37 |
|
| Outstanding
at October 31, 1998 |
4,707,457 |
|
|
47 |
|
Granted
Expired or canceled
Exercised |
1,079,810
(256,145
(303,736 |
)
) |
|
43
47
35 |
|
| Outstanding
at October 31, 1999 |
5,227,386 |
|
$ |
47 |
|
|
Exercisable
at:
October 31, 1999
October 31, 1998
October 31, 1997 |
3,407,398
3,210,580
1,964,137 |
|
|
|
At
October 31, 1999, there are 5,227,386 options outstanding
with exercise prices between $35 and $68, with a weighted-average
exercise price of $47 and a weighted-average remaining
contractual life of 5.7 years; 3,407,398 of these
options are exercisable with a weighted-average exercise
price of $49.
At
October 31, 1999, 3,674,875 of the 5,227,386 options
outstanding have exercise prices between $35 and $49,
with a weighted-average exercise price of $40 and
a weighted-average remaining contractual life of 5.3
years; 2,010,480 of these options are exercisable
with a weighted-average exercise price of $41. The
remaining 1,552,511 outstanding options have exercise
prices between $50 and $68, with a weighted-average
exercise price of $61 and a weighted-average remaining
contractual life of 6.4 years; 1,396,918 of these
options are exercisable with a weighted-average exercise
price of $61.
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Lease
Obligations
Net rental expense amounted to approximately $98 million,
$92 million and $93 million in 1999, 1998 and 1997,
respectively. The company’s lease obligations
relate primarily to office facilities, equipment used
in connection with long-term construction contracts
and other personal property.
During
1998, the company entered into a $100 million operating
lease facility to fund the construction cost of its
corporate headquarters and engineering center. The
facility expires in 2004. Lease payments are calculated
based on LIBOR plus approximately .35 percent. The
lease contains an option to purchase these properties
during the term of the lease and contains a residual
value guarantee of $82 million. In addition, during
1999 the company entered into a similar transaction
to fund construction of its Calgary office. The total
commitment under this transaction is approximately
$25 million.
The
company’s obligations for minimum rentals under
noncancelable leases are as follows:
| At
October 31, |
|
|
(in
thousands)
2000
2001
2002
2003
2004
Thereafter |
$46,358
43,531
38,140
34,595
22,264
62,067 |
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Contingencies
and Commitments
The company and certain of its subsidiaries are
involved in litigation in the ordinary course of
business. The company and certain of its engineering
and construction subsidiaries are contingently liable
for commitments and performance guarantees arising
in the ordinary course of business. Claims arising
from engineering and construction contracts have
been made against the company by clients, and the
company has made certain claims against clients
for costs incurred in excess of the current contract
provisions. The company does not expect that the
foregoing matters will have a material adverse effect
on its consolidated financial position or results
of operations.
Disputes
have arisen between a Fluor Daniel subsidiary and
its client, Anaconda Nickel, which primarily relate
to the process design of the Murrin Murrin Nickel
Cobalt project located in Western Australia. Both
parties have initiated the dispute resolution process
under the contract. Results for the year ended October
31, 1999 for the Fluor Daniel segment include a provision
totaling $84 million for the alleged process design
problems. If and to the extent that these problems
are ultimately determined to be the responsibility
of the company, the company anticipates recovering
a substantial portion of this amount from available
insurance and, accordingly, has also recorded $64
million in expected insurance recoveries. The company
vigorously disputes and denies Anaconda’s allegations
of inadequate process design.
Financial
guarantees, made in the ordinary course of business
on behalf of clients and others in certain limited
circumstances, are entered into with financial institutions
and other credit grantors and generally obligate the
company to make payment in the event of a default
by the borrower. Most arrangements require the borrower
to pledge collateral in the form of property, plant
and equipment which is deemed adequate to recover
amounts the company might be required to pay. As of
October 31, 1999, the company had extended financial
guarantees on behalf of certain clients and other
unrelated third parties totaling approximately $29
million.
In
connection with its 1997/1998 share repurchase program,
the company entered into a forward purchase contract
for 1,850,000 shares of its common stock at a price
of $49 per share. The contract matures in October
2000 and gives the company the ultimate choice of
settlement option, either physical settlement or net
share settlement. As of October 31, 1999, the contract
settlement cost per share exceeded the current market
price per share by $11.44.
Although
the ultimate choice of settlement option resides with
the company, if the price of the company’s common
stock falls to certain levels, as defined in the contract,
the holder of the contract has the right to require
the company to settle the contract.
The
company’s operations are subject to and affected
by federal, state and local laws and regulations regarding
the protection of the environment. The company maintains
reserves for potential future environmental costs
where such obligations are either known or considered
probable, and can be reasonably estimated.
On
October 20, 1999, the U.S. District Court for the
Southern District of West Virginia issued an injunction
which prohibits the construction of valley fills over
both intermittent and perennial stream segments as
a part of mining operations. While Massey is not a
party to this litigation, virtually all mining operations,
including Massey, utilize valley fills to dispose
of excess materials. This decision is now under appeal
to the Fourth Circuit Court of Appeals and the District
Court has issued a stay of its decision pending the
outcome of the appeal. Based upon the current state
of the appeal, the company does not believe that Massey
mining operations will be materially affected during
the pendency of the appeal. If and to the extent that
the District Court’s decision is upheld and legislation
is not passed which limits the impact of the decision,
then all or a portion of Massey’s mining operations
could be affected. The potential impact to Massey
arising from this proceeding is not currently estimable.
The
company believes, based upon present information available
to it, that its reserves with respect to future environmental
costs are adequate and such future costs will not
have a material effect on the company’s consolidated
financial position, results of operations or liquidity.
However, the imposition of more stringent requirements
under environmental laws or regulations, new developments
or changes regarding site cleanup costs or the allocation
of such costs among potentially responsible parties,
or a determination that the company is potentially
responsible for the release of hazardous substances
at sites other than those currently identified, could
result in additional expenditures, or the provision
of additional reserves in expectation of such expenditures.
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Operations
by Business Segment and Geographical Area
In the fourth quarter of 1999, the company adopted
Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise
and Related Information” (SFAS No. 131). The
statement establishes new standards for the way that
business enterprises report information about operating
segments as well as the related disclosures about
products and services, geographical areas and major
customers. The adoption of SFAS 131 did not affect
the consolidated results of operations or financial
position of the company, but did affect the business
segments that are disclosed. Prior year disclosures
have been restated to conform to the new basis of
reporting.
Fluor
Daniel consists of five business units: Chemicals
& Life Sciences; Oil, Gas and Power; Mining; Manufacturing;
and Infrastucture. These units provide design, engineering,
procurement and construction services on a worldwide
basis to an extensive range of industrial, commercial,
utility, natural resources and energy clients. The
types of services provided by Fluor Daniel include:
feasibility studies, conceptual design, detail engineering,
procurement, project and construction management and
construction.
Fluor
Global Services consists of six business units: American
Equipment Company; TRS Staffing Solutions; Fluor Federal
Services; Telecommunications; Operations & Maintenance;
and Consulting Services. These units provide a variety
of services to clients in a wide range of industries.
The types of services provided by Fluor Global Services
include: equipment sales, leasing, services and outsourcing
for construction and industrial needs; temporary technical
and non-technical staffing specializing in technical,
professional and administrative personnel; services
to the United States government; repair, renovation,
replacement, predictive and preventative services
to commercial and industrial facilities; and productivity
consulting services and maintenance management to
the manufacturing and process industries.
Massey
Coal is a single business unit which produces, processes
and sells high-quality, low-sulfur steam coal to the
utility industry as well as industrial customers,
and metallurgical coal for the steel industry.
Fluor
Signatures Services is a single business unit established
primarily to provide traditional business services
and business infrastructure support to the company.
Ultimately, such services may be marketed to external
customers. Although operations for this segment did
not start until November 1, 1999, historical total
asset data has been presented for information purposes
only.
The
reportable segments follow the same accounting policies
as those described in the summary of major accounting
policies. Management evaluates a segment’s performance
based upon operating profit and operating return on
assets. Intersegment revenues are insignificant. The
company incurs costs and expenses and holds certain
assets at the corporate level which relate to its
business as a whole. Certain of these amounts have
been charged to the company’s business segments
by various methods, largely on the basis of usage.
Engineering
services for international projects are often performed
within the United States or a country other than where
the project is located. Revenues associated with these
services have been classified within the geographic
area where the work was performed.
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Operating
Information by Segment
| (in
millions) |
|
Fluor
Daniel |
|
|
Fluor
Global
Services |
|
|
Coal |
|
|
Fluor
Signature
Services |
|
|
Total |
|
1999
External revenues
Depreciation, depletion and amortization
Operating profit before special provision
Total assets
Capital expenditures
1998
External revenues
Depreciation, depletion and amortization
Operating profit
Total assets
Capital expenditures
1997
External revenues
Depreciation, depletion and amortization
Operating profit
Total assets
Capital expenditures |
$
$
$
$
$
$ |
8,403
61
160
1,017
51
9,736
67
161
1,270
91
10,180
68
70
1,259
83 |
|
$
$
$
$
$
$ |
2,931
90
92
1,041
226
2,642
72
81
968
214
3,038
49
52
894
116 |
|
$
$
$
$
$
$ |
1,083
167
147
1,956
227
1,127
150
173
1,801
296
1,081
131
155
1,619
267 |
|
$
$
$ |
—
—
—
454
—
—
—
—
465
—
—
—
—
509
— |
|
$
$
$
$
$
$ |
12,417
318
399
4,468
504
13,505
289
415
4,504
601
14,299
248
277
4,281
466 |
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Reconciliation
of Segment Information to Consolidated Amounts
| (in
millions) |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
Operating
Profit
Total segment operating profit before special
provision
Special provision
Corporate administrative and general expense
Interest (expense) income, net
Other items, net |
$ |
399
(117
(55
(33
(8 |
)
)
)
) |
$ |
415
—
(23
(24
(5 |
)
)
) |
$ |
277
—
(13
(8
(1 |
)
)
) |
|
|
| --Earnings
before taxes |
$ |
186 |
|
$ |
363 |
|
$ |
255 |
|
|
|
|
(in millions) |
|
1999 |
|
|
1998 |
|
|
1997 |
|
|
|
Total
assets
Total assets for reportable segments
Cash, cash equivalents and marketable securities
Other items, net |
$ |
4,468
210
208 |
|
$ |
4,504
341
174 |
|
$ |
4,281
309
95 |
|
|
|
| --Total
assets |
$ |
4,886 |
|
$ |
5,019 |
|
$ |
4,685 |
|
|
|
|
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Enterprise-Wide
Disclosures
|
Revenues |
Total
Assets |
| (in
millions) |
|
1999 |
|
1998 |
|
1997 |
|
1999 |
|
1998 |
|
1997 |
|
United
States*
Europe
Central and South America
Asia Pacific (includes Australia)
Middle East and Africa
Canada |
$ |
7,139
1,228
825
1,575
795
855 |
$ |
8,324
1,196
1,242
1,435
993
315 |
$ |
9,347
1,420
1,110
1,545
549
328 |
$ |
3,995
196
221
265
68
141 |
$ |
4,082
255
256
252
77
97 |
$ |
3,789
225
210
315
78
68 |
|
|
$ |
12,417 |
$ |
13,505 |
$ |
14,299 |
$ |
4,886 |
$ |
5,019 |
$ |
4,685 |
|
|
* Includes export revenues to unaffiliated
customers of $1.6 billion in 1999, $1.5 billion
in 1998 and $1.8 billion in 1997. |
|
