Fiscal
1999 marked significant progress towards achieving a
number of important objectives. We steered Fluor in
a new strategic direction to reposition the company
as a knowledge-based professional services and engineering,
procurement and construction (EPC) company, with a significant
investment in low-sulfur coal.
Fiscal
1999 was a disappointing year in terms of achieving
earnings growth and improving our return on investment.
The environment was unfavorable for many of our EPC
and global services businesses and for Massey Coal.
Initiatives to mitigate this difficult environment were
successful and allowed us to achieve profit expectations
for the year. Net earnings, excluding the effect in
total of a special provision, were $204.7 million, or
$2.70 per share, compared with $235.3 million, or $2.97
per share in 1998.
New
Strategic Direction
Our
new strategic direction, which was announced in March,
included a number of components. The company has been
realigned into four principal Strategic Business Enterprises
(SBE’s), each with clear performance accountability.
Specific actions included clarifying roles and responsibilities
as we implemented our new strategy, substantially reducing
our costs, enhancing our project execution, and increasing
selectivity in the projects and customers we serve.
The
company’s engineering and construction segment
is now managed as two distinct SBE’s: Fluor Daniel,
which will focus purely on EPC opportunities; and Fluor
Global Services, a diverse, but integrated portfolio
of services designed to capitalize on increasing growth
opportunities outside the traditional EPC value chain.
Fluor Constructors, Inc. continues in its role as the
union craft arm of Fluor Corporation. A.T. Massey, our
Coal SBE, continues to focus on leveraging its exceptional
management and market position to enhance shareholder
value through emphasis on stronger cash flow and return
on investment. Another SBE was created with the formation
of Fluor Signature Services (FSS). This new enterprise
is an important element of our new strategic direction
and represents a new approach to providing business
and administrative support services to Fluor operating
units. By assigning responsibility for the delivery
of these important services to FSS, operating units
are now able to devote their full energies on their
core business activities. Additionally, the consolidation
of business services within FSS will reduce costs, improve
quality standards, and over time, provide an incremental
earnings stream to the corporation.
Other
key milestones achieved in 1999 included a reduction
in gross overhead expenses by $160 million annually
which is expected to result in cost savings beginning
in 2000 of $100-120 million annually. Accomplishing
this goal required closure of nonstrategic offices and
a reduction in personnel of approximately 5,000. This
cost reduction is expected to translate into higher
profit margins as our strategies and more selective
market focus begin to stimulate renewed volume growth.
A detailed business model process was implemented throughout
the company to set priorities, assure financial discipline,
enhance accountability and establish a culture of financial
transparency. Meaningful progress was also achieved
in driving increased selectivity towards higher-margin
business opportunities. Selectivity is a continuing
strategy across the company and will be supported by
the recently formed global account management organization,
reporting directly to me. Their primary objective is
to broaden and strengthen relationships with our most
important clients.
We
also launched two important initiatives that will significantly
impact our businesses in the coming years: Knowledge@WorkSM
— a major revamping of our work processes and information
management systems that will improve access to and use
of company knowledge and the timeliness of financial
and operating information; and a new brand architecture
to create a visual identity for our new company structure
and competitive strategy, linking our diverse range
of services under the Fluor name, while creating individual
identities for each of our strategic business enterprises.
While
much has been accomplished in 1999, further improvement
is required to achieve our goals for sustained long-term
earnings growth and higher levels of profitability,
leading to enhanced shareholder value. We remain committed
to our goals of achieving a return on assets above our
cost of capital and delivering earnings per share growth
of at least 10 percent annually. We are also committed
to growing the capability of our organization individually
and collectively so that we can more profitably serve
customer needs.
Financial
Condition
Fluor’s
financial condition remains strong, with both our debt
ratio and interest coverage supporting a solid “A”
investment grade credit rating. We significantly reduced
short-term debt during the year which lowered our total
debt to capitalization ratio to 26 percent from 32 percent
a year ago. We are aggressively working to reduce the
level of assets employed in our businesses to further
enhance returns.
As
a sign of our improving business outlook and continuing
financial strength, Fluor’s board of directors
declared a 25 percent increase in the quarterly dividend
for 2000 to 25 cents per share, compared with 20 cents
in 1999. Additionally, our dividend policy was changed
for the first time in many years. The payout guideline
was increased to 30-35 percent of earnings from the
previous 25-30 percent, and will now be based on long-term
operating performance expectations. Previously, our
dividend payout was based on the company’s prior
year’s earnings performance.
Fluor
Daniel
Faced
with continuing weakness in several global economic
markets and abnormally low oil prices at the beginning
of 1999, Fluor Daniel implemented actions to mitigate
the effects of a deteriorating business environment,
as well as steps to reposition the company for long-term
profitability and growth. Marketing and sales efforts
were focused on a narrower client base where differentiated
value could be delivered, offering higher margin potential.
Backlog and new awards declined in 1999, as expected
from a year ago, primarily reflecting the market slow
down experienced over the past two years, along with
our emphasis on improving margins. However, increased
selectivity, accompanied by cost reductions and increased
accountability, began to produce positive results. Reported
gross margin, along with new awards and backlog gross
margins, all achieved meaningful improvement in 1999.
Continuing improvement in global economic conditions
which are favorable to increased capital spending by
clients is creating growing optimism for new business
in 2000 and beyond.
Fluor
Global Services
Formed
in 1999, Fluor Global Services brings together a variety
of non-EPC services capabilities. These services offer
attractive incremental revenue growth and earnings for
Fluor as the result of changing client needs and the
continuing trend toward outsourcing. Importantly, Fluor
Global Services has the potential to significantly broaden
our participation in our clients’ total spending
across the entire life cycle of their asset base. The
majority of the services provided by Fluor Global Services
have a more stable and predictable earnings pattern
which should help mitigate the more cyclical nature
of our traditional EPC business.
We
are particularly encouraged by the outstanding growth
potential for Fluor Global Services’ Telecommunications
unit, which was awarded several key contracts in 1999,
with significant additional work anticipated in 2000.
The Operations & Maintenance unit is also benefiting
from its new strategic approach to delivering value
in this large and growing market.
A.T.
Massey Coal
A.T.
Massey delivered commendable performance in 1999 despite
an extremely challenging coal market. They are an acknowledged
leader in the U.S. coal industry and continue to outperform
industry peers on virtually every criteria, from financial
results to safety performance.
Global
economic conditions, unfavorable currency exchange rates,
and mild weather created difficult conditions in both
Massey’s steam coal and higher-margin metallurgical
coal markets. This resulted in softened demand and deteriorating
prices for coal. To offset these conditions, Massey
implemented a number of operational changes to reduce
costs and maintain operating margins, as well as optimize
return on assets. As the lowest cost producer in its
geographic market, Massey is much better positioned
to withstand these difficult times than its competition.
Fluor
Signature Services
Fluor
Signature Services is our newest Strategic Business
Enterprise. It officially began operations at the start
of 2000. Created as a distinct enterprise with profit-and-loss
accountability, its charter is to provide business and
administration support services to Fluor’s operating
units. Their immediate goal is to help the corporation
further reduce costs, streamline work processes and
to identify and measure where value is created within
the company.
Management
Changes
As
part of the organizational restructuring, Alan Boeckmann
has assumed leadership of Fluor Daniel, Jim Stein is
now leading Fluor Global Services, and Don Blankenship
continues to lead A.T. Massey Coal. Jim Rollans, our
former chief financial officer, is heading up Fluor
Signature Services.
In
June, we were pleased to welcome Ralph Hake as executive
vice president and chief financial officer, succeeding
Jim Rollans. Ralph joins us from Whirlpool where he
served since 1987, overseeing various global business
and financial operations, most recently as senior executive
vice president and chief financial officer.
Thank
You
I
would like to extend my personal appreciation to our
board of directors and employees for the tremendous
effort that has been undertaken to reposition our company
and achieve our goal to deliver improved shareholder
value in the years to come.
I
am confident that we are moving well down the path to
realize the potential we envision from our new strategic
direction.
Lastly,
let me add my appreciation for the support and confidence
of our shareholders who have stayed with us through
our transition to a new Fluor in the new millennium.
Philip
J. Carroll, Jr.
Chairman and Chief Executive Officer
January 13, 2000
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