| FLUOR CORP Item 1A Risk Factors We bear the risk of cost overruns in approximately 32prca of the dollar-value of our contracts |
| We may experience reduced profits or, in some cases, losses under these contracts if costs increase above our estimates |
| We conduct our business under various types of contractual arrangements |
| In terms of dollar-value, the majority of our contracts allocate the risk of cost overruns to our client by requiring our client to reimburse us for our costs |
| Approximately 32prca of the dollar-value of our contracts, however, are guaranteed maximum price or fixed price contracts, where we bear a significant portion of the risk for cost overruns |
| Under these fixed price contracts, contract prices are established in part on cost and scheduling estimates which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of labor, equipment and materials, and other exigencies |
| If these estimates prove inaccurate, or circumstances change such as unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, cost of raw materials, our suppliers’ or subcontractors’ inability to perform, cost overruns may occur, and we could experience reduced profits or, in some cases, a loss for that project |
| From time to time, we may also assume a project’s technical risk, which means that we may have to satisfy certain technical requirements of a project despite the fact that at the time of project award, we may not have previously produced the system or product in question |
| Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future earnings |
| As of December 31, 2005, our backlog was approximately dlra14dtta9 billion |
| We cannot guarantee that the revenues projected in our backlog will be realized or, if realized, will result in profits |
| Projects may remain in our backlog for an extended period of time |
| In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog |
| Backlog reductions can adversely affect the revenue and profit we actually receive from contracts reflected in our backlog |
| Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog and the revenues and profits that we actually receive |
| Finally, poor project or contract performance could also impact our profits |
| If we guarantee the timely completion or performance standards of a project, we could incur additional costs to cover our guarantee obligations |
| In some instances and in many of our fixed price contracts, we guarantee a customer that we will complete a project by a scheduled date |
| We sometimes provide that the project, when completed, will also achieve certain performance standards |
| If we subsequently fail to complete the project as scheduled, or if the project subsequently fails to meet guaranteed performance standards, we may be held responsible for cost impacts to the client resulting from any delay or the costs to cause the project to achieve the performance standards, generally in the form of contractually agreed-upon liquidated damages |
| To the extent that these events occur, the total costs of the project would exceed our original estimates and we could experience reduced profits or, in some cases, a loss for that project |
| The nature of our engineering and construction business exposes us to potential liability claims and contract disputes which may reduce our profits |
| We engage in engineering and construction activities for large facilities where design, construction or systems failures can result in substantial injury or damage to third parties |
| We have been and may in future be named as a defendant in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters |
| These claims generally arise in the normal course of our business |
| When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits |
| Our professional liability coverage is on a “claims-made” basis covering only claims actually made during the policy period currently in effect |
| In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims |
| Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which claims may reduce our profits and cash available for operations |
| 11 _________________________________________________________________ [65]Table of Contents We have seen an increase in our claims against project owners for payment and our failure to recover adequately on these and future claims could have a material effect on us |
| We have over the past few years seen an increase in the volume and the amount of claims brought by us against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price |
| These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope, which result in additional costs, both direct and indirect |
| Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is often difficult to accurately predict when these claims will be fully resolved |
| When these types of events occur and unresolved claims are pending, we have used significant working capital in projects to cover cost overruns pending the resolution of the relevant claims |
| A failure to promptly recover on these types of claims could have a material adverse impact on our liquidity and financial condition |
| The demand for our services and products is dependent upon the existence of projects with engineering, procurement, construction and management needs |
| Although downturns can impact our entire business, our telecommunications and power markets exemplify businesses that are cyclical in nature and have recently been affected by a decrease in worldwide demand for these projects |
| Industries such as these and many of the others we serve have historically been and will continue to be vulnerable to general downturns and are cyclical in nature |
| As a result, our past results have varied considerably and may continue to vary depending upon the demand for future projects in these industries |
| Our continued success requires us to hire and retain qualified personnel |
| Over the past year, the demand for employees who engage and are experienced in the services we perform has grown as our customers have increased their capital expenditures and the use of our services |
| The success of our business is dependent upon being able to attract and retain personnel, including executive, management and craft employees, who have the necessary and required experience and expertise |
| In addition, we are moving our corporate headquarters to Irving, Texas from Southern California in the spring |
| While we have asked a large number of employees to relocate to Irving, we may suffer some employee losses for those employees who elect not to move which could in turn have an impact on our public company reporting and other corporate activities |
| If we cannot find and keep the employees necessary to execute our contracts or to perform necessary corporate activities, it could have a material adverse impact on our business or financial results |
| Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded revenues or profits |
| Under our accounting procedures, we measure and recognize a large portion of our profits and revenues under the percentage of completion accounting methodology |
| This methodology allows us to recognize revenues and profits ratably over the life of a contract by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred |
| The effect of revisions to revenues and estimated costs is recorded when the amounts are known and can be reasonably estimated, and these revisions can occur at any time and could be material |
| On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long term contracts |
| However, given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenues and profits |
| We have international operations that are subject to foreign economic and political uncertainties |
| Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased costs and potential losses |
| Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions which are beyond our control |
| As of December 31, 2005, approximately 65prca of our projected backlog consisted of engineering and construction revenues to be derived from facilities to be constructed in other 12 _________________________________________________________________ [66]Table of Contents countries; we expect that a significant portion of our revenues and profits will continue to come from international projects for the foreseeable future |
| Operating in the international marketplace exposes us to a number of risks including: • abrupt changes in foreign government policies and regulations, • embargoes, • trade restrictions; • tax increases; • United States government policies, and • international hostilities |
| The lack of a well-developed legal system in some of these countries may make it difficult to enforce our contractual rights |
| We also face significant risks due to civil strife, acts of war, terrorism and insurrection |
| Our level of exposure to these risks will vary with respect to each project, depending on the particular stage of each such project |
| For example, our risk exposure with respect to a project in an early development stage will generally be less than our risk exposure with respect to a project in the middle of construction |
| To the extent that our international business is affected by unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses |
| Project disruptions and losses could significantly reduce our revenues and profits |
| Our government contracts may be terminated at any time |
| Also, if we do not comply with restrictions and regulations imposed by the government, our government contracts may be terminated and we may be unable to enter into future government contracts |
| The termination of our government contracts could significantly reduce our expected revenues |
| We enter into significant government contracts, from time to time, such as those that we have with the US Department of Energy at Fernald and Hanford |
| Government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits by government representatives and profit and cost controls |
| Government contracts are also exposed to uncertainties associated with Congressional funding |
| The government is under no obligation to maintain funding at any specific level and funds for a program may even be eliminated |
| In addition, government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements |
| For example, we must comply with the Federal Acquisition Regulation (“FAR”), the Truth in Negotiations Act, the Cost Accounting Standards (“CAS”), the Service Contract Act and Department of Defense security regulations |
| We must also comply with various other government regulations and requirements as well as various statutes related to employment practices, environmental protection, recordkeeping and accounting |
| If we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated, and we could be temporarily suspended or even debarred from government contracting or subcontracting |
| We also run the risk of the impact of government audits, investigations and proceedings, and so-called “qui tam” actions brought by individuals or the government under the Federal False Claims Act that, if an unfavorable result occurs, could impact our profits and financial condition, as well as our ability to obtain future government work |
| For example, government agencies such as the US Defense Contract Audit Agency (the “DCAA”) routinely review and audit government contractors |
| If these agencies determine that a rule or regulation has been violated, a variety of penalties can be imposed including criminal and civil penalties all of which would harm our reputation with the government or even debar us from future government activities |
| The DCAA has the ability to review how we have accounted for costs under the FAR and CAS, and if they believe that we have engaged in inappropriate accounting or other activities, payments to us may be disallowed |
| 13 _________________________________________________________________ [67]Table of Contents If one or more of our government contracts are terminated for any reason including for convenience, if we are suspended from government contract work, or if payment of our costs is disallowed, we could suffer a significant reduction in expected revenues and profits |
| Some of our projects and new business may be located in environments where anti-corruption initiatives are not followed |
| We often perform our projects in countries with less robust legal systems or which are in the developmental stage |
| Transparency International, an international organization which reviews potential governmental and institutional corruption, has rated many of the countries poorly in terms of their acceptance of corruption and their enforcement of anti-corruption laws and rules |
| It is the policy of the company to comply with all applicable anti-bribery laws such as the Foreign Corrupt Practices Act (the “FCPA”) of the United States and the applicable laws of all foreign countries in which we operate |
| Under the FCPA, among other things, US-based companies such as Fluor and our agents or other intermediaries are precluded from offering anything of value to foreign officials or governments with the intent of obtaining or retaining business, or to otherwise obtain an improper advantage |
| We train our staff concerning FCPA issues, and we also inform our partners, subcontractors, agents and others who work for us or on our behalf that they must comply with FCPA requirements |
| We also have procedures and controls in place to monitor internal and external compliance |
| If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions which could have a material adverse effect on our business |
| We work in international locations where there are high security risks, which could result in harm to our employees or unanticipated costs |
| Some of our services are performed in high risk locations, such as Iraq, where the country or location is suffering from political, social or economic issues, or war or civil unrest |
| In those locations where we have employees or operations, we may incur substantial costs such as security costs to maintain the safety of our personnel |
| Moreover, despite these activities, in these locations, we cannot guarantee the safety of our personnel |
| We continue to expand our business in areas where bonding is required, but bonding capacity is limited |
| We continue to expand our business in areas where the underlying contract must be bonded, especially in the transportation infrastructure arena |
| Because of the overall lack of worldwide bonding capacity, we can find it difficult to find sureties who will provide the contract-required bonding |
| In addition, these contracts are often very large and extremely complex, which often necessitates the use of a joint venture, often with a competitor, to bid on and perform these types of contracts, especially since it may be easier to jointly pursue the necessary bonding |
| However, entering into these types of joint ventures or partnerships exposes us to the credit and performance risks of third parties, many of whom are not as financially strong as we are |
| If our joint venturers or partners fail to perform, we could suffer negative results |
| It can be very difficult or expensive to obtain the insurance we need for our business operations |
| As part of business operations, we maintain insurance both as a corporate risk management strategy and in order to satisfy the requirements of many of our contracts |
| Insurance products have become increasingly expensive and sometimes very difficult to obtain |
| Although we have in the past been generally able to cover our insurance needs, there can be no assurances that we can secure all necessary or appropriate insurance in the future |
| Our international operations expose us to foreign currency fluctuations that could increase our US dollar costs or reduce our US dollar revenues |
| Because our functional currency is the US dollar, we generally try to denominate our contracts in United States dollars |
| However, from time to time our contracts are denominated in foreign currencies, which results in our foreign operations facing the additional risk of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange |
| Changes in the value of foreign currencies could increase our US dollar costs for, or reduce our US dollar revenues from, our foreign operations |
| Any increased costs or reduced revenues as a result of foreign currency fluctuations could affect our profits |
| 14 _________________________________________________________________ [68]Table of Contents Intense competition in the engineering and construction industry could reduce our market share and profits |
| We serve markets that are highly competitive and in which a large number of multinational companies compete, such as the Bechtel Group, Inc, Jacobs Engineering Group, Halliburton’s Kellogg Brown & Root, Chicago Bridge and Iron Company NV, CH2M Hill Companies Limited, Parsons Engineering Group, the Shaw Group and Washington Group International, and international companies such as Foster-Wheeler Ltd, Technip-Coflexip and AMEC plc |
| In particular, the engineering and construction markets are highly competitive and require substantial resources and capital investment in equipment, technology and skilled personnel |
| Competition also places downward pressure on our contract prices and profit margins |
| Intense competition is expected to continue in these markets, presenting us with significant challenges in our ability to maintain strong growth rates and acceptable profit margins |
| If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits |
| The success of our joint ventures depend on the satisfactory performance by our joint venture partners of their joint venture obligations |
| The failure of our joint venture partners to perform their joint venture obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture |
| We enter into various joint ventures as part of our engineering, procurement and construction businesses, such as ICA Fluor and project specific joint ventures |
| The success of these and other joint ventures depend, in large part, on the satisfactory performance of our joint venture partners of its joint venture obligations |
| If our joint venture partners fail to satisfactorily perform their joint venture obligations as a result of financial or other difficulties, the joint venture may be unable to adequately perform or deliver its contracted services |
| Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services |
| These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture |
| We may have additional tax liabilities |
| We are subject to income taxes in the United States and numerous foreign jurisdictions |
| Significant judgment is required in determining our worldwide provision for income taxes |
| In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain |
| We are regularly under audit by tax authorities |
| Although we believe that our tax estimates are reasonable, the final outcome of tax audits and related litigation could be materially different than that which is reflected in our financial statements |
| In addition, prior to the reverse spin-off involving our former coal segment, our predecessor-in-interest received a ruling from the Internal Revenue Service that the reverse spin-off qualified as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended |
| The ruling was granted based upon certain representations made by our predecessor-in-interest |
| While we are not aware of any facts or circumstances that would cause those representations to be incorrect or incomplete, if those representations were inaccurate, it is possible that the ruling would no longer be valid |
| In such event, we could incur a significant corporate tax liability that could have a material adverse effect on our financial condition |
| Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits |
| We are subject to numerous environmental laws and health and safety regulations |
| Our projects can involve the handling of hazardous and other highly regulated materials which, if improperly handled or disposed of, could subject us to civil and criminal liabilities |
| It is impossible to reliably predict the full nature and effect of judicial, legislative or regulatory developments relating to health and safety regulations and environmental protection regulations applicable to our operations |
| The applicable regulations, as well as the technology and length of time available to comply with those regulations, continue to develop and change |
| In addition, past activities could also have a material impact on us |
| For example, when we sold our mining business formerly conducted through St |
| Joe Minerals Corporation, we retained responsibility for certain non-lead related environmental liabilities, but only to the extent that such liabilities were not covered by St |
| Joe’s comprehensive general liability insurance |
| While we are 15 _________________________________________________________________ [69]Table of Contents not currently aware of any material exposure arising from our former St |
| Joe’s business or otherwise, the costs of complying with rulings and regulations or satisfying any environmental remediation requirements for which we are found responsible could be substantial and could reduce our profits |
| If we experience delays and/or defaults in customer payments, we could suffer liquidity problems or we could be unable to recover all expenditures |
| Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on client projects as they are incurred |
| Delays in customer payments may require us to make a working capital investment |
| If a customer defaults in making its payments on a project in which we have devoted significant resources, it could have a material negative effect on our results of operations |
| Our recent and any future acquisitions may not be successful |
| We expect to continue to pursue selective acquisitions of businesses |
| We cannot assure you that we will be able to locate suitable acquisitions or that we will be able to consummate any such transactions on terms and conditions acceptable to us, or that such transactions will be successful |
| Acquisitions may bring us into businesses we have not previously conducted and expose us to additional business risks that are different than those we have traditionally experienced |
| We also may encounter difficulties diligencing or integrating acquisitions and successfully managing the growth we expect to experience from these acquisitions |
| In the event we make acquisitions using our stock as consideration, we could dilute share ownership |
| As we have announced, we intend to grow our business not only organically but also potentially through acquisitions |
| One method of paying for acquisitions or to otherwise fund our corporate initiatives is through the issuance of additional equity securities |
| If we do issue additional equity securities; this could have the effect of diluting our earnings per share and shareholders’ percentage ownership |
| Delaware law and our charter documents may impede or discourage a takeover or change of control |
| We are a Delaware corporation |
| Various anti-takeover provisions under Delaware law impose impediments on the ability of others to acquire control of us, even if a change of control would be beneficial to our stockholders |
| In addition, certain provisions of our bylaws may impede or discourage a takeover |
| For example: • our Board of Directors is divided into three classes serving staggered three year terms; • vacancies on the board can only be filled by other directors; • there are various restrictions on the ability of a shareholder to nominate a director for election; and • our Board of Directors can authorize the issuance of preference shares |
| These types of provisions could make it more difficult for a third party to acquire control of us, even if the acquisition would be beneficial to our shareholders |
| Accordingly, shareholders may be limited in the ability to obtain a premium for their shares |
| As a holding company, we are dependent on our subsidiaries for cash distributions to fund debt payments |
| Because we are a holding company, we have no true operations or significant assets other than the stock we own of our subsidiaries |
| We depend on dividends, loans and other distributions from these subsidiaries for us to be able to pay our debt and other financial obligations |
| Contractual limitations and legal regulations may restrict the ability of our subsidiaries to make such distributions or loans to us or, if made, may be insufficient to cover our financial obligations, or to pay interest or principal when due on our debt |
| 16 _________________________________________________________________ [70]Table of Contents We are dependent upon third parties to complete many of our contracts |
| We also rely on third-party equipment manufacturers or suppliers to provide much of the equipment used for projects |
| If we are unable to hire qualified subcontractors or find qualified equipment manufacturers or suppliers, our ability to successfully complete a project could be impaired |
| If the amount we are required to pay for subcontractors or equipment and supplies exceeds what we have estimated, especially in a lump sum or a fixed-price type contract, we may suffer losses on these contracts |
| If a supplier, manufacturer or subcontractor fails to provide supplies, equipment or services as required under a negotiated contract for any reason, we may be required to source these supplies, equipment or services on a delayed basis or at a higher price than anticipated which could impact contract profitability |
| We maintain a workforce based upon current and anticipated workloads |
| If we do not receive future contract awards or if these awards are delayed, significant costs may result |
| Our estimates of future performance depend on, among other matters, whether and when we will receive certain new contract awards |
| While our estimates are based upon our good faith judgment, these estimates can be unreliable and may frequently change based on newly available information |
| In the case of large-scale domestic and international projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award |
| The uncertainty of contract award timing can present difficulties in matching our workforce size with our contract needs |
| If an expected contract award is delayed or not received, we could incur costs resulting from reductions in staff or redundancy of facilities that would have the effect of reducing our profits |
| Systems and information technology interruption could adversely impact our ability to operate |
| As a global company, we are heavily reliant on computer, information and communications technology and related systems in order to properly operate |
| From time to time, we experience occasional system interruptions and delays |
| If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, systems operation could be interrupted or delayed |
| In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, power loss, telecommunications failures, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions |
| Any of these or other events could cause system interruption, delays and loss of critical data, could delay or prevent operations, and could adversely affect our operating results |