Document MJK848rZLeZMBm1EvBG12R9RL

HIGHLIGHTS Fluor Corporation Sin thousands, except per share amounts/ Year ended October 31, FISCAL YE AR Revenues from continuing operations Loss from continuing operations Net earnings (loss) Earnings (loss) per share Continuing operations Net earnings (loss) Funds provided from (used by) continuing operations Capital expenditures Cash dividends per common share AT YEAR END Total assets Capitalization Long-term debt Shareholders' equity Total capitalization Percent of total capitalization Long-term debt Shareholders' equity Shareholders' equity per common share Number of employees 1986 1985 1984 $4,660,261 (28,026) (60,443) (.35) (.76) 53,619 91,619 $ .40 $4,097,218 (553,672) (633,324) (7.00) (8.01) (152,100) 121,216 $ .40 $4,239,863 (6,758) 1,008 (.09) .01 47,913 285,514 $ .60 $2,565,393 519,439 950,240 $1,469,679 35.3 64.7 $ 11.99 22,309 $2,796,364 259,064 1,033,904 $1,292,968 20.0 80.0 $ 13.06 26,958 $3,891,618 724,777 1,696,363 $2,421,140 29.9 70.1 $ 21.49 32,153 CONTENTS .HI ] HIGHLIGHTS 2 CHAIRMAN'S LETTER 6 INDEX TO OPERATIONS 7 OPERATIONS REPORT 7 Engineering and Construction Overview 7 Process Sector 9 Power Sector 10 Industrial Sector 11 Hydrocarbon Sector 13 Government Sector 15 Natural Resources Overview 16 Coal 16 Gold 18 Domestic Metals 19 International Minerals 20 Operating Statistics 22 FINANCIALS 22 Management's Discussion and Analysis 27 Consolidated Financial Statements 43 Independent Auditors' Opinion 47 REFERENCE INFORMATION 47 Directors 47 Officers 48 Principal Subsidiaries and Divisions 48 Stockholder's Reference COMPANY DESCRIPTION V5* Fluor Corporation is engaged in two core businesses: engineer ing and construction (E&C) services, and natural resources management. The company provides E&C services which include feasibility studies, con cept design, project manage ment, engineering, construction, procurement, and maintenance. These services are focused on five global business sectors: process, power, industrial, hydrocarbon, and government. The company also manages the exploration, development, pro duction and marketing of natural resources--principally coal, gold, silver, lead, zinc, copper, tin, and iron ore. DR 2801106 CHAIRMAN'S LETTER Dear Fellow Shareholder: 1w;; A year ago we reported on a major restructuring program undertaken to meet the chal lenge of a dramatically changed business environment. Our objective was to streamline the company, reduce costs and refocus our two core businesses to succeed in the prevailing economic climate, ssi Restructuring actions completed in 1986 offer both short- and long-term benefits: Fluor Engineers and Daniel International, the company's two main engineering and construc tion units, were blended into a single, more market-responsive, worldwide organization. Fluor's gold properties were consolidated into St. Joe Gold Corporation with 10 percent of the shares sold to the public for $39 million in gross proceeds. The sale of Fluor's Irvine complex was concluded with receipt of a final payment of $35 million. The facility was sold for a total price of $340 million in 1985. Fluor's offshore drilling serv ices and real estate operations were sold for $39 million, essentially completing the dis position of the company's non-core businesses. Effective November 1986, the company's domestic lead opera tions were combined with those of Homestake Mining Company in a joint venture owned 57.5 percent by Fluor. These actions, coupled with those taken last year, generated substantially improved results. The company reported a net loss of $60 million, or 76 cents per share for 1986, compared with a net loss of $633 million, or $8.01 per share for 1985. Restructuring actions included in 1986 results amounted to net gains of approximately $50 mil lion, compared with net charges of approximately $400 million in 1985. Importantly, excluding the one-time financial effects of these restructurings, our two core businesses showed sig nificant improvement. zm While we are pleased that our restructuring program is deliv ering bottom-line improve ments, we are disappointed that Fluor did not return to prof itability this past year. The pace of our recovery was con strained because several key engineering and construction (E&C) markets continued to deteriorate and prices for most commodities sold by Fluor either declined or showed no improvement until late in the year. With new tax legislation now in place, oil prices stabiliz ing, most relevant commodity prices moving upward, and with the expectation of contin ued economic growth, we are looking forward to improved business conditions in 1987 and enhanced profit potential for Fluor. STRATEGIC DIRECTION AND OBJECTIVES Despite continuing challenges in our markets, we are confi dent that the strategy of nar rowing the company's focus on its two core businesses will lead to superior results and return to shareholders. Although cyclical, both the E&C and natural resources industries offer excellent long term growth and profit potential. In E&C we are a leading, worldclass service organization with superior marketing capability. The industries we serve are broadly diversified and our record of outstanding project management and execution on complex assignments, both large and small, is unsurpassed. The basic strengths, track record and potential of Fluor's Natural Resources Manage ment Group are equally impres sive. Excellent management, exploration and development skills, backed by outstanding ore bodies and low production costs, continue to be hallmarks of the operation. Our leadership position in the marketplace is also enhanced by product and geographic diversification. Management's ongoing restruc turing program is dedicated to restoring both operations to superior levels of growth and profitability. ENGINEERING AND CONSTRUCTION \* The most significant accom plishment of the E&C group in 1986 was the blending of Fluor Engineers, Inc. and Daniel International into a single. DR 2801107 worldwide organization--Fluor Daniel. The new group con centrates on five key business sectors--process, power, industrial, hydrocarbon and government. This action, reflective of changes in the marketplace, signals a new philosophy for the company. It enables us to offer clients the fully integrated services of our E&C organiza tion from each of our 54 offices located around the world as opposed to limiting certain offices to specific industries and markets. 1 We introduced the Fluor Daniel concept in the international marketplace in 1985. The move was well received by our cli ents and has allowed the com pany to secure contracts overseas which were not previously attainable. Early indications are that the concept will be equally suc cessful in the U.S. Our goal is to increase penetration of existing markets, move more rapidly into new markets, reduce costs, and increase flexi bility so that we can adjust quickly to the changing needs of our clients. Fluor's Engineering and Con struction Group as a whole cut its losses in 1986 despite the performance of Fluor Construc tors, the company's union construction arm. This unit, which is organized and operates independently of Fluor Daniel, experienced sizeable overruns this past year on contracts awarded under extremely com petitive market conditions. The unit underwent a change in leadership and direction, and overruns are not expected to continue in 1987. E&C bookings for the year to talled $3 billion compared with $4.5 billion in 1985. Backlog at year-end 1986 stood at S4.3 bil lion compared with $5.1 billion the prior year. Three of the five E&C business sectors experi enced an improvement in backlog: power, process and government. These gains were offset by a continued down ward trend in the Hydrocarbon Sector and a decline in the Industrial Sector which had achieved dramatic growth since 1983. NATURAL RESOURCES :IV? The Natural Resources Man agement Group reported an improvement of more than $80 million in operating results in 1986, compared with the prior year. This improvement ex cludes lead and coal write-offs taken in 1985. Coal operations achieved record operating prof its and production despite a 10 percent decline in average prices; gold operations posted improved operating profits due largely to higher prices; and base metals operations showed a sizeable reduction in losses in the fourth quarter. These gains were also achieved as a result of our success in further reducing costs and improving productivity. We also made progress against two important strategic goals in the natural resources area. First, the establishment of St. Joe Gold Corporation and the sale of 10 percent of its stock. This represents a meaningful step toward reducing the com pany's investment in certain assets to generate cash and improve returns. Second, the combining of our domestic lead operation with that of Homestake Mining Company offers two important benefits. As the major owner of the new enter prise--The Doe Run Com pany--we have leveraged the unique talents of our base met als management team. Also, the combination of our low-cost production with Homestake's high-grade producing proper ties creates a more flexible, cost-efficient operation. This combination can be competitive in today's lead market. FINANCIAL STRENGTH Maintaining the company's financial strength and flexibility was a key objective in 1986. wam During July and August we completed approximately $250 million in domestic and foreign medium-term financings at effective interest rates ranging from 9.3 to 9.7 percent. The for eign issues were hedged to protect against currency fluctu ations. Proceeds from these borrowings were used prima rily to pay prior years' federal income tax obligations and associated interest. M3 Because we, in effect, repaid one interest bearing obligation with another, total interest bearing obligations of the com pany remained essentially unchanged. However, our long term debt-to-total capitalization ratio was 35 percent at the end of 1986, versus 20 percent a year ago. DR 2801108 The company underwent its annual review with the major credit agencies and retained its investment quality rating. Cash dividends paid to share holders in 1986 were 18 cents per quarter or 40 cents per share for the year, the same as in 1985. Capital expenditures totalled $92 million. In 1985, capital expenditures were $121 million. Investment levels of less than $100 million have proven ample to maintain high-quality, costeffective facilities in the current business environment, so no change is planned for the coming year. SOUTH AFRICAN OPERATIONS In December, Fluor announced the divestment of its South African operations, selling 100 percent of the assets to an independent trust. Under the trust's ownership, operations will be directed by local man agement, enabling continued employment for the racially integrated work force. in a December letter to share holders, we pointed out that Fluor still believes sanctions and withdrawal of U.S. firms from South Africa are counter productive to achieving a peaceful solution to the prob lems of racial inequality. But as uncertainties of continued operation in South Africa esca late, we felt that an orderly transfer of ownership at this time would be in the best interests of all concerned. We have retained a repurchase option on the assets sold and look forward to the day when we can return to that country as an equity owner and partici pate in its economic growth. MANAGEMENT CHANGES Floor's board of directors lost three members and long-term, valued employees last year with the retirements of Vice Chairman Charles N. Cannon and Group Vice President and Chief Financial Officer George W. Mefferd, and the resignation of Executive Vice President Dean K. Allen. In January 1987, Robert L. Guyett, formerly Vice President and Treasurer of The LTV Corpora tion, was appointed Senior Vice President and Chief Financial Officer of Fluor Corporation and was elected to the Execu tive Committee and board of directors. In addition, Allen E. Puckett, Chairman and CEO of Hughes Aircraft Company joined the board, and Joseph V. McKee, Jr. retired. Fluor Corporation's board now includes 15 members, with nine outside and six inside directors. Also in fiscal 1987, John A. Wright, President and Chief Operating Officer of Fluor Cor poration and Chairman of St. Joe Minerals Corporation, a Fluor subsidiary, assumed the additional responsibilities of CEO for St. Joe Minerals and DR "801109 Chairman and CEO of St. Joe Gold Corporation, which is 90 percent owned by Fluor. In both positions, he replaces Peter J. Neff who resigned. During fiscal 1986, Fluor Direc tor Leslie G. McCraw assumed new responsibilities as Presi dent and Chief Executive Officer of Fluor Daniel. Mr. McCraw, who has been President and Chief Executive Officer of Daniel International, joined Fluor's board in 1984 and is a member of the Executive Committee. 1 Reporting to Mr. McCraw are Fluor Director Hugh K. Coble, Group President, International Operations; Gerald H. Glenn, Group President, Marketing and Sales; and Vince L. Kontny, Group President, U.S. Operations. OUTLOOK This has been a challenging year for Fluor, but we've made great strides in completing necessary restructuring actions and improving operating results of our two core businesses. Much remains to be done. mm We intend to focus on the following objectives in 1987: Realize full benefits from the new Fluor Daniel organization's intensified global marketing efforts; Capitalize on the encouraging upward trend in commodity prices; Continue our corporate-wide cost containment efforts; Muster the superior talent of Fluor people in every part of the organization. .J Throughout its 75-year history, Fluor has faced cyclical down turns and emerged each time stronger and more successful. The current slowdown, though prolonged, is no different. m The company's nucleus of skills remains intact. Thanks to the hard work and dedication of our employees, Fluor enjoys the reputation of an industry leader and retains all the ingredients necessary for success: We're in the right business, serving industries that are an integral part of the global econ omy with an infinite diversity of markets. As a company, we have accu mulated over the years a wealth of technological expertise unmatched by any competitor. We have demonstrated the determination and flexibility to change course dramatically in response to new opportunities. Fluor expanded rapidly in a period of explosive economic growth, and restructuring such a large organization to meet today's market challenges has not been easy. But the most difficult tasks are behind us. Now we are ready to achieve our goal for 1987: success on the bottom line. January 15,1987 J. J. \J/), David S. Tappan, Jr. Chairman of the Board and Chief Executive Officer DR ?801110 PARAGRAPH INDEX TO OPERATIONS REPORT Aerospace 15,29,34,41 Aguilar Mine 118 Automation 10.16,37,41 Automotive 15,29,33,41,101,107 Backlog 12,20,32,39,52, 54 BalmatZinc Mine 110 Biotechnology 9,14,19 Buick Mine 105,106 Bulk Chemicals 9,18 Business Sectors 4,12,17 Carbonate District 88 Chemical Processing 57 Coal 23, 25, 27,48,67, 68,74, 78 Coal Prices 75-77,81 Cogeneration 22,45,53 Commercial 29,38,41,54 Composites 9,10,15,19 Consumer Products 29,37 Copper 53,68,92 Daniel International Corporation 3 Defense Industry 29,34,56,64 Doe Run Company 105,106 Domestic Metals 96 E&C Industry 6 El Indio Mine 85,89-92,94 Electronics 15,29,41 Engineering and Construction 2,7,65 Fibers 9,10,16 Film 9,10,16,19 Fine and Specialty Chemicals 9,10,15 Fluor Daniel 3,4,8,21,28,42, 55 Fluor Engineers, Inc. 3 Fluor Venture Group 5,27,53 Food 29,3741 Gas Processing 43,52, 54 Goid 48, 53 57 63,32, 86,93 Gold Prices a3 86 Golden Patr.cia 88 Government Sector 4,12,17,55 Hazardous Waste 57-59,64,113 Heavy inoustrs 23 Herculaneum Smelter 105,106 Hydrocarbon Sector 4,12,17,42 Hydroelectric 22 Industrial Sector 4 12,17,28 International M rerals 115 Iren Ore 68,S7, '12 Lead 45, 53.68, 97-102,104, 105, 111, 113, ' 16--'18 Lead Prices 98-100,104 MacmneToc s 29 Maintenances. 11,14,19,23,24, 27,31,34, 41,53.57 61 Manufacturing 29 Markets (Marketplace) 3,6,9,14,22,24,29, 31,33.27 23,41,49-51,56, 58-60,62 Massey Coat Company 75,78-81 Minerals Prices 67.68,70,71, 98,119 Mining (E&C, 43,48 Mocambo Tin Mine 119 JESS Natural Resource industry 67,73 Natural Resources Group 5,66,69 Nuclear Fuel Cycle 57,62-64 ... | Oil Prices 6,43,44,46, 48, 76, 77 Pea Ridge Mine 112 Petrochemicals 43,46,52-54 , ' Petroleum 43, 52,54 Pharmaceuticals 9,10,14,19 Pipelines 43,47, 51,53 Plastics 9,10,15,19 Power Industry 23,24,27,79 Power Sector 4,12,17,21, 54 Process Sector 4,8,12,17 Production 43, 53,68,75,76, 78, 79, 90-95,97,110 112,116,118,119 Pulp and Paper 29,36,41 , Refining 43-45, 53 Resource Recovery 22,27 St. uCe Domestic Metals 97, 98,104,105, 109,112,113 St. Joe Gold Corporation 83-85,87, 88, 90, 91,95 St. Joe International Corporation 116,118,119 St. Joe Minerals Corporation 67,84 Services 3,11,13,14,23,24, 27, 31,41, 53, 56-58,61,64 Silver 68,92,97,116 , Synfuels 43,48,52 Tamoo94 Telecommunications 57,60,61 Textiles 9 Transoortation 29,40, 56,64, 79 Utility Plants 22, 23,25,76 '1 Yuba Placer Gold Company 85,95 1 Zinc 68, 97,98,100,103,107-110,113, 114,116-118 Zinc Prices 98,100,103,109, 110 dr 2801111 OPERATIONS REPORT ' `ENGINEERING AMO CONSTRUCTION OVERVIEW mil During 1986, Fluor Corporation subsidiaries, Fluor Engineers, Inc. and Daniel Internationa! Corporation, completed a major reorganization which combined the two entities into a single worldwide operating unit-- Fluor Daniel. This reorgani zation, motivated by changing conditions in the marketplace, dramatically increases the group's flexibility. Fluor Daniel can now offer clients its fully integrated services from each of its 54 offices located around the world. These services include feasibility studies, con cept design, project manage ment, engineering, construction, procurement, and maintenance. The new group is concentrating on five global business sectors: process, power, industrial, hydrocarbon and government. Fluor Daniel is now geared to respond immediately to client needs in each of these sectors. The new organization is aggressively supported by the Fluor Venture Group, formed to provide or arrange financial backing for specific engineer ing and construction (E&C) projects, as well as selected activities of Fluor's Natural Resources Management Group, r-r Although certain E&C markets showed growth in 1986, the industry continued to suffer from the effects of a highly competi tive business environment. Low economic growth, a sharp drop in oil prices, a too-strong dollar, and uncertainty regarding changes in U.S. taxes, all com bined to slow the E&C indus try's recovery. FLUOR D ANI EL'S PROCESS SECTOR The Process Sector includes pharmaceuticals, fine and specialty chemicals, fibers, film, textiles, plastics, bulk chemi cals, composites and biotech nology. These markets typically undergo broad cycles caused, in part, by fluctuating feedstock and energy costs, changes in currency exchange, and interest rates. Most of the external factors that drive the Process Sector are now moving in a positive direc tion. Opportunities within this sector are enhanced by: auto mation and technology upgrades in fiber, film and fine chemical plants; development of new technologies for fine and specialty chemicals; and accel erated introduction of new products in plastics, composites, and pharmaceuticals. n Fluor Daniel has for many years enjoyed a superior record in providing services to the DR 2801112 domestic process industry and this reputation has spread inter nationally. Fluor Daniel offers a full range of services, from siting to design and construction, maintenance, technical serv ices, and project finance. The sector has offices throughout the world, and a reputation for understanding the technologies used in the process industries. In general, projects in the proc ess industry tend to be smaller, and clients prefer a company which can provide more than one specialized service. The emphasis today is on getting more value for money spent. The pharmaceutical and bio technology markets have not experienced cyclical downturns in recent years because of growing demand for new prod ucts. These businesses are expected to undergo moderate growth with most spending allo cated to plant renovations, expansions, and research and development facilities. In addi tion to design and construction experience, pharmaceutical firms look for E&C companies that can also provide start-up assistance, maintenance, and validation services to meet fed eral requirements. Clients in this industry prefer companies familiar with their specific equipment and technologies. Fine and specialty chemicals should see moderate growth in the U.S. and Western Europe, driven by demand from industries such as plastics, electronics and building products. Additional demand will come from the increasing use of special com posites and engineered plastics in the automotive, computer, aerospace, and construction industries. In fine and specialty chemicals, clients prefer an E&C company that provides flexi bility, and the ability to manage and deliver projects quickly. The fibers and film markets, while very price-sensitive in world competition, should remain stable. Clients in 'these * fields prefer a contractor who can help them save money through productivity, automation and debottlenecking. The outlook for the bulk chemi cal industry is stable, with little growth anticipated near-term. Active 1986 Fluor Daniel projects in this sector include: Design and construction of a major engineered plastics proj ect in Alabama. Evergreen E&C projects in the U.S. and Europe for a worldwide chemical producer. Design, construction and maintenance of over 20 phar maceutical plants in Puerto Rico. E&C management for a film plant in Illinois. Design and construction of a special composites plant in California. Design, construction and maintenance of a major bio technology facility in New York. E&C for a lysine plant in Iowa for a joint venture of Japanese and French companies. DR ?Bl>n 13 FLUOR DANIEL'S POWER SECTOR The Power Sector addresses domestic projects through five markets: new utility construc tion, support to existing utility plants, resource recovery, small hydroelectric facilities, and cogeneration. The U.S. power industry has changed dramatically in recent years. Demand for electricity is expected to grow at an average of two percent per year over the next decade. No nuclear plants have been ordered do mestically since 1977 and plans for new construction of fossilfuel plants (oil, coal, gas) are modest compared to a decade ago. Interest in smaller alter natives to traditional power sources will grow in impor tance because utilities are re luctant to build large, base-load facilities. E&C opportunities are centered on retrofitting existing plants, life extension programs, maintenance, and other oper ational plant services. Clients are interested it applying new technologies that help improve a facility's efficiency. Fluor Daniels Power Sector concentrates o services that add value to the clients' oper ations. They offer a range of services including: engineer ing, procurement, construction, maintenance, aid equity par ticipation. The Power Sector's project execution capability is located throughout the U.S. to serve power-generating mar kets. Fluor Daniel is capable of performing any size project and the company enjoys a sound reputation in the power industry. The Power Sector also has expertise in an emerging tech nology called integrated gasi fication combined cycle-- a method which can increase a plant's capacity at low risk, yet high efficiency. The technol ogy allows a utility to bring new capacity on-line in incre ments consistent with its loadgrowth instead of a large power plant all at once. Also, the Power Sector has experi ence in building atmospheric fluidized bed combustion units, a technology that provides a practical method for generating energy from high-sulfur coals with a minimum of noxious emissions. Fluor Daniel's services to the power industry are reflected in its active projects in 1986, including: Contracted maintenance work on lignite and gas plants in Texas. A contract to provide per sonnel to support a nuclear program in Tennessee. A total responsibility contract for a resource recovery project in Massachusetts, where it also has an ownership position through Fluor's Venture Group. Engineering and procurement for a coal-fired, 550-megawatt station in Kentucky. Operating plant maintenance at three new nuclear plants-- one in Kansas, and two in Arkansas--and renewal work at a plant in South Carolina. 1982 19 2,9 4.b 3.0 DR 2801114 FLUOR DANIEL'S INDUSTRIAL SECTOR The industrial engineering and construction market addressed by Fluor Daniel is divided into six markets: automotive and general manufacturing; aero space, defense and electronics; heavy industries such as metals, machine tools and transportation; pulp and paper; foods and consumer products; and commercial. MS Intense competition and a disin flationary economic climate have forced American industry to reduce production costs and increase productivity without sacrificing quality. Many manu facturers are emphasizing the modernization and upgrading of their plants instead of building new facilities. - r. A Fluor Daniel's Industrial Sector has extensive capabilities in every major field of the domes tic industrial market, with expe rience going back 50 years. The sector offers siting, environmen tal studies, conceptual design, engineering, construction, main tenance, training, and technical services. With the consolidation of Fluor and Daniel, the sector now serves industries world wide, with particular emphasis on quality, scheduling, and cost systems designed to meet the needs of each job. In the automotive industry, cap ital expenditures in 1986 were flat, but this market will con tinue to be an active source of new business for E&C compa nies. Most outlays have been for modernizations and other efficiency improvements. Structural changes among many aerospace firms are creating a more complex and diversified industry. An important trend is the increased emphasis by the Department of Defense on cost cutting, improved reliability, and maintenance. The metals industry's production is expected to remain flat, pri marily because of severe com petition from third-world nations. In pulp and paper, expenditures are largely for retrofits and up grades to make existing plants more cost-effective. The foods and consumer prod ucts market is stable, with capital spending aimed at in creasing automation and capac ity modernization to decrease operating costs. MS As a result of the new tax bill, spending in the domestic com mercial construction market is expected to fall, with office and hotel building experiencing the steepest decline. However, projects to build prisons are active with over 40 states under court order to improve or expand their correctional facilities. DR 2801 It5 *3 Federal deficit concerns have reduced aid to transportation programs, but iocai and private investment funds are increasing. mi Examples of the Industrial Sector's 1986 active projects include: A contract to provide design and construction services, training and automation support to an automobile plant in Georgia. Three construction manage ment jobs for an aerospace company in California. The work includes an anechoic test chamber, metals processing building, and a radio frequencyshielded building. Construction of a maximum security prison in Texas. Design and construction of a large pulp and paper plant in Georgia. Project management services for a Michigan steel company. A series of construction man agement and equipment instal lation jobs in seven states for a food company. Design and construction of a food plant in North Carolina. Construction management for a hotel in South Carolina. Commercial maintenance for a naval base in South Carolina. A joint venture with The Allen Group of New York aimed at the factory automation systems market, with two projects underway. Design and construction sup port for automotive facilities in Ohio. A project to design facilities and equipment for an auto mobile electronics test facility in Michigan. Design and build responsibil ities for an electronics plant in Malaysia. Construction management for a university and an airport in Saudi Arabia. 2EO FLUOR DANIEL'S HYDROCARBON SECTOR rr The Hydrocarbon Sector in cludes oil and gas production, petroleum refining, petrochemi cals, pipelines, gas process ing, synfuels, and mining. This industry is sluggish because oil prices collapsed from $26 per barrel to a low of $8. Although prices have been firming, un certainty prevailed in 1986. JTL Oil and gas development activ ity in the U.S. has been hard hit by the drop in crude prices; in addition, oil companies are plagued with over-capacity in refining. In Canada, many projects have been delayed. Asia remains a primary explo ration target, with key areas being Indonesia, Malaysia and The Peoples' Republic of China. 'M3 In the U.S. and Europe, invest ment will be centered in three areas: refinery up-grades to process heavy oil; lead phasedown or gasoline octane DR 280136 enhancement; and more cogen eration projects, advanced controls, and other efficiency improvements to increase profit margins. .M3 Lower prices for oil--the feed stock for petrochemical plants --should impact that industry worldwide by stimulating in creased capital expenditures in the near term. Retrofits of older facilities should be a growing segment of total petrochemical construction. SO In pipelines, there is increased activity outside the U.S. for the first time in five years. HH Low crude oil prices have kept the development of synthetic fuels at a low level. And in mining and plant construction, activity is expected to remain relatively fiat for the short term though the outlook is improving for gold and coal projects. 3*J Fluor Daniel's reputation in the hydrocarbon field is one of the best known and most respected in the world. During 1986, the organization was sized to match a contracting market, while retaining the core capa bilities needed to grow quickly when the cycle turns up again, sra Despite weak activity, this mar ket offers opportunities for E&C companies that can offer cli ents: in-depth understanding of new technologies to make hydrocarbon plants more effi cient and productive; three dimensional computer-aided design technology to reduce costs; small-job expertise; and the ability to mobilize and manage large projects. Teaming relationships can be critical in todays competitive worldwide E&C market envi ronment. Fluor Daniel recently joined with a French firm to engineer an 850-kilometer natural gas pipeline in Turkey. Other examples of 1986 active projects in the Hydrocarbon Sector include: A contract to study the first phase of a 620-mile pipeline carrying gas from the South China Sea to Hainan Island and Guangdong Province in The Peoples' Republic of China. Phase one of the Olympic Dam copper, gold and uranium metallurgical plants and copper refinery in Australia. A joint venture management contractor project for phase two of a $650-million heavy oil refinery expansion in Canada. Continuing maintenance serv ices for a large petrochemical complex in Saudi Arabia. Refinery modernization to improve process efficiencies and save energy for a client's DR 2801117 FLUOR DANIEL'S GOVERNMENT SECTOR facilities in Texas, Indiana and Virginia. An agreement to develop a 49megawatt gas-fired cogenera tion facility through Floor's Venture Group. Fluor Daniel will do engineering, construc tion, operations, and mainte nance of the plant. Engineering, procurement, and construction on two lead phasedown projects in California. Engineering and procurement assistance on an oil and gas production platform offshore Indonesia. Maintenance services at 20 separate locations in the U.S. Engineering, procurement, and construction management on an isomer unit in Norway. Completion of a Flexicoker in Holland. Refinery instrumentation mod ernization work in Australia, Saudi Arabia, and Africa. The Government Sector ad dresses a mature and intensely competitive market by provid ing a full range of services to federal, state, and local govern ments. U.S. federal government entities currently served by Fluor Daniel include: Department of Energy (DOE), Department of Defense (DOD), Department of Commerce (DOC), and Depart ment of Transportation (DOT), including numerous branches within those departments. The sector has strong capabili ties in chemical processing, hazardous waste treatment, nuclear fuel cycle work, engi neering, construction, operation, and maintenance services for technologically advanced facili ties and systems integration in telecommunications. The environmental services market has been expanding to meet government regulations that seek to comply with grow ing public concern. Political resolve to find a solution to the growing toxic waste problem in the U.S. is gaining momentum on federal, state, and local levels. Projects in environmental services will be funded by government and private monies. To best penetrate the hazardous waste market, Fluor Daniel is pursuing teaming relationships with well-established waste management firms. Fluor Daniel offices are strategically located in proximity to states that pro duce more than 40 percent of the nation's hazardous waste, an important factor in the com petition for government-funded projects. In telecommunications, techno logical developments and the breakup of AT&T continue to drive the market. A major part DR 2801118 of this growing sector is in E&C projects to replace thousands of miles of copper wiring with fiber optic cables worldwide. M3 Fluor Daniel has routinely pro vided voice and data communi cations services for many projects over the years. In the spring of 1983, Fluor Daniel established its telecommuni cations services division to capitalize on this expertise. Fluor Daniel is an objective provider of a full range of telecommuni cations services for voice and data communications pro jects, as well as ongoing opera tions. These services include: project management and con sulting, engineering, procure ment, installation, systems integration, operations, and maintenance. 3BEH Nuclear fuel cycle contracts for DOE make up the largest seg ment of Fluor Daniels Govern ment Sector work. Markets include: uranium enrichment, fuel fabrication, spent fuel storage, fuel reprocessing, and nuclear waste processing, disposal and storage. :M3 The Government Sectors ad vanced technology division has become a preeminent contrac tor in the engineering of DOE nuclear fuel cycle facilities. The company is also aggressively pursuing work with the DOD and is rapidly establishing its credentials with other govern ment entities. mi Fluor Daniel's 1986 active gov ernment projects include: Contracts for the DOD, includ ing engineering services at Vandenburg Air Force Base, two U.S. Marine Corps Air Stations in California, and other Air Force and defense agency units. Support on a ground-h' laser concept defnitio; technology identification, an important classified program being pursued by the Strategic Defense Initiative organization. Program management and inspection services for nearly 200 facilities for the National Weather Service. Project management oversight services for five projects in New York for the Urban Mass Transit Administration. Project management oversight for the Detroit People Mover. The first phase of architect engineering services for con ceptual design on the Hanford Waste Vitrification Plant in Washington. Architectural engineering for conceptual design for a nuclear waste salt repository. Recently completed design of a cellular radio system for the Gulf of Mexico. Management support services for a 23,000-mile nationwide fiber optic system. Work on portions of the U.S. Informa'Si' * .("-'s 'h i- izainui >. .> . ht 3 America. DR 2801119 JS1 NATURAL RESOURCES OVERVIEW Fluor's Natural Resources Management Group, which is operated through St Joe Miner als Corporation, retained to profitability in fiscal 1SS6 de spite depressed economic con ditions in the industry. Losses in base metals were reduced dramatically due to extensive cost cutting and improving prices; record operating profits were achieved in coal through productivity gains and higher volumes, despite lower prices; and earnings from gold were ahead of last year as a result of better prices. Natural resources produced by the group are principally coal, gold, silver, lead, zinc, copper, tin, and iron ore. Prices for these minerals have been gen erally depressed over the last five years. Ten years ago, minerals prices spiraled upward on expecta tions of robust economic growth and prolonged shortages. However, as new capacity was coming on-line, the world economy went into a recession and inflation was replaced by disinflation. Demand and prices receded and minerals producers were left with over capacity and excess inventories. Lower commodity prices re duced the ability of developing nations to repay foreign debt and pay for imports. Many countries reacted by increasing commodity exports already in oversupply, further weakening prices. In addition, the strong dollar made U.S. minerals less competitive at home and abroad. In response to the growing glut of minerals, indus trial nations cut back capacity and closed or sold inefficient operations. Consumption patterns of base metals changed as growth in advanced industrialized nations increasingly shifted their economies into high technology and services industries. Tech nological innovations and new environmental laws also con tributed to the displacement of some metals. In addition, low industrial growth rates and high real interest rates provided a powerful incentive to reduce costs by carrying less inventory. US The natural resources indus tries responded to these condi tions by improving productivity and becoming more competi tive. During 1986, inventory and capacity levels in the natural resources industries served by the group have been reduced sharply and consumption in industrialized economies has steadied. DR 2801120 COAL Despite low prices, Fiuor's 50 percent owned Massey Coal Company (the remaining 50 per cent owned by Shell) reported record earnings and production in fiscal 1986. Skyrocketing oil prices during the 1970s set off intense devel opment of coal production capacity as a cheaper alternative to oil. U.S. production increased to 824 million tons in 1980, up 27 percent over 1975. That year, electric utilities accounted for 72 percent of coal consumption in the U.S. In order to offset spiraling oil prices, utilities in creased their consumption of coal to 82 percent by 1980. How ever, as oil prices softened and the world economy slowed in the 1980s, the coal industry was left with excess capacity and weakening prices. Declining oil prices in 1986 have encouraged some substitution of oil forcoal, but it has been minor thus far. Downward pressure on coal prices has motivated the industry to become more effi cient by improving productivity. M3 Massey produces mostly lowsulphur steam coal that meets the environmental standards of the 1977 Clean Air Act. Massey's mines are located in the eastern U.S., near transportation, and most of its coat is sold largely under long-term contracts to the power industry. The com pany also brokers coal. In 1986, the Massey partnership sold a record 23 million tons of coal (excluding brokered coal), up four million tons from 1985. Operating costs were signifi cantly cut through the closure of high-cost metallurgical mines, productivity gains, and the absence of 1985s strike. Despite a 10 percent drop in the average price per ton of coal, 1986 was one of Massey's best years. Some long-term contracts were renegotiated to accom modate declining prices, but increased tonnage or longerterm contracts were received in exchange. GOLD A combination of economic and political factors increased world gold prices during fiscal 1986. St. Joe Gold Corporation's average realized gold price for 1986 was $355 per ounce, up 11 percent from 1985's $320, the lowest price since 1979. In early fiscal 1986, St. Joe Minerals Corporation combined its gold properties in the United States, Canada and Chile into one company, St. Joe Gold Corporation. In January 1986, St. Joe Gold sold three million shares at $13 per share, gener ating gross proceeds of $39 mil lion. A total of 31 million shares are outstanding, 90 percent owned by Fluor. St. Joe Gold holds an 83 percent interest in the El Indio gold mine in Chile, one of the five lanj; `u * n * ? 'i t . in the Vvesieru liumisphere, and a two-thirds interest in the DR 2801121 Yuba Placer Gold Company, a joint venture in California. The company also has interests in 28 active gold and platinum exploration sites in the U.S., Canada, and Chile. St. Joe Gold plans to allocate $10 to $12 million per year for exploration over the next three to five years. Exploration ex penditures in fiscal 1986 were $12 million, compared to $10 million for the previous year. In March 1986, St. Joe Gold announced a discovery on its Golden Patricia property in northern Ontario, Canada. Fea sibility studies, underground work, and additional drilling are underway and results are encouraging. Richmond Hill in the Carbonate District of South Dakota, also in the feasibility stage, shows promise for fur ther development in 1987. mm Gold at the El India mine con sists of three ore Iffes: direct smelting ore (DSQ|; milling ore; and heap-leach ore. DSO is a high grade ore that does not require mill processing prior to shipping to smelters. :M2 El Indio, representing about 95 percent of St. Joe's gold pro duction, produced 280,700 ounces in fiscal 1986, compared with 294,300 ounces in fiscal 1985. The decline was due pri marily to fewer tens mined of DSO, which was partially offset by an increase it milling ore production. *3 St. Joe Gold's net cash produc tion cost in fiscal 1986 at El Indio was $147 per ounce-- compared with $138 last year-- among the lowest for Western Hemisphere mines. ma In fiscal 1986, DSO averaged 4.97 ounces of gold per ton. DSO reserves are expected to last through fiscal 1989, though in declining grade. Milling ore is processed prior to shipment to smelters. The average grade of milling ore processed in 1986 was .29 ounces per ton. The mill has a capacity of 1,930 tons per day and will be expanded to 2,650 tons in fiscal 1987. Sil ver and copper by-products are also produced at El Indio. ,113 Low-grade ore is processed by a low-cost recovery technique called heap leaching. Heapleach processing facilities were constructed in 1986 at Tambo, five miles from El Indio. Tambo is expected to produce 10,000 ounces of gold in 1987 and 20,000 ounces in future years. St. Joe Gold's California pro duction was down from 15,100 ounces in 1985 to 12,800 ounces in 1986, primarily due to flood ing from abnormally heavy rains. Work to improve efficiency and reduce costs is in progress. DR 2801122 DOMESTIC METALS 3E3 St. Joe Domestic Metals' oper ations produce lead, zinc, and silver as a by-product In the last 10 years these industries have changed considerably. A shift to a disinflationary econo my and fundamental changes in consumption patterns for lead and zinc have resulted in a ma jor restructuring of these indus tries. Production cutbacks, capacity closures, and labor settlements have improved pro ductivity and enhanced the abil ity of U.S. producers to compete against imports. St. Joe Domes tic Metals also produces iron ore pellets. M3 In 1986, St. Joe significantly reduced operating losses in its domestic metals operations in the fourth quarter through cost cutting, productivity improve ments, and higher prices toward the end of the year. Operating losses in 1986 were concentrat ed in the first three quarters. The impact of improving lead and zinc prices began flowing to the bottom line in the fourth quarter, bringing operating results to almost breakeven for that period. *E3 Measured in inflation-adjusted dollars, zinc prices during 1986 were at their lowest since 1932. Similarly, the average price for lead during the first half of fiscal 1986 was the lowest in the 20th century. Ml The battery market accounts for about 70 percent of total lead consumption in the U.S. Lead in automobile batteries declined over the last 10 years, but has been increasing in industrial batteries. Lead as a gasoline additive was reduced from a peak of over 20 percent of the market in 1970 to less than three percent in 1986. M53 Total lead consumption in the U.S. is estimated to have de clined by about one percent in calendar 1986 to approximately 1.2 million tons. About 11 per cent was imported. *E1 St. Joe sold 194,000 tons of lead in 1986, up nine percent over 1985. The average price for lead for the year was 19 cents per pound, about flat compared with 1985. mm Effective November 1, 1986, St. Joe and Homestake Mining Company formed a joint venture combining their domestic lead operations into a partnership, The Doe Run Company, 57.5 per cent owned by St. Joe and 42.5 percent by Homestake. St. Joe contributed its Herculaneum smelter, five mines, and three mills. Homestake contributed its Buick lead mine, mill, and smelter. All operations are in southeast Missouri. :*ei Doe Run will achieve improved efficiencies by combining the high-grade ore reserves of the Buick mine with the highcapacity Herculaneum smelter. DR 2801123 '"mu 5 Weight reduction programs in the automobile industry in the 1970s replaced zinc diecastings with plastics and other mate rials. In 1985, the average car contained about 20 pounds of zinc compared to 45 pounds in 1976. However, in recent years, zinc consumption has been increasing for electrogalvanized steel for automobiles and galva nized steel in construction. HE Zinc consumption in 1986 is esti mated to be 940,000 tons in the U.S., up two percent from 1985. The U.S. imports 70 percent of the zinc metal it consumes. MM In 1986, St. Joe sold 144,000 tons of zinc metal, up 32 percent. The average fiscal year price for zinc, however, was 34 cents per pound, over 17 percent below fiscal 1985. In addition, St. Joe sold about 35,000 torts of zinc metal equivalent. 'Era Cost reduction was the main emphasis in 1986. Despite a year-long strike at the Balmat, New York, zinc mire, the facility operated at about 30 percent capacity and has begun to produce zinc concentrates at world-competitive orices. mm St. Joe also producas iron ore pellets at its Pea Ridge mine in Missouri, primarily for the steel industry. Sales of pellets declined 43 percent in 1986 due to plant closures by a major cus tomer who will be replaced in 1987, or operations will be re structured to produce alternate products and limited tonnage of iron ore pellets. MB During 1986, development con tinued on St. Joes flame reactor technology for the treatment of electric arc furnace dust, a hazardous waste by-product of the steel industry. The process produces a non-bazardous slag and recovers lead and zinc. as INTERNATIONAL MINERALS MH3 St. Joe International's operation produces lead and zinc concen trates and by-product silver in Argentina; and tin in Brazil. M3 The Argentine lead and zinc industries have been plagued by price controls and increasing wages. These conditions should be improved in 1987 because of new legislation. mm Lead and zinc concentrates are produced at St. Joe's Aguilar mine in Argentina. In 1986, St. Joe International sold 29,000 tons of lead concentrates and 33,000 tons of zinc concentrates. Costs were cut and recoveries improved. mm The tin market was disappoint ing in 1986. Artificially sup ported prices collapsed in October 1985 and, though they were firming in late 1986, world wide inventories were still fairly high. Production from St. Joe's Mocambo tin mining complex in Brazil will begin in 1987. DR 2801124 OPERATING STATISTICS ENGINEERING AND CONSTRUCTION $ in thousands/ , Year ended October 31, 1986 1985 1984 1983 1982 Work Performed Revenues Operating Profit (Loss) New Orders Backlog Manpower $3,817,200 3,688,315 (75,607) 2,992,200 $4,291,400 12,068 $3,438,327 3,179,308 (84,883) 4,485,300 $5,114,700 14,530 $4,458,238 3,205,987 94,604 4,151,261 $4,194,247 16,353 $6,335,741 4,104,454 210,676 1,244,553 $5,610,687 18,998 $ 7,526,128 5,384,723 228,587 2,908,822 $10,711,815 24,498 BACKLOG BY INDUSTRY AND LO C AT 1 O N $ in millions $1986 % $1985 % $ 1984 % $1983 % $1982 % Process Power Industrial Hydrocarbon Government 610 1,032 1,865 690 94 14.2 24.0 43.5 16.1 2.2 536 762 2,453 1,289 75 10.5 14.9 48.0 25.2 1.4 324 412 1,690 1,700 68 7.7 9.9 40.3 40.5 1.6 120 1,649 506 3,293 43 2.1 29.4 8.9 58.8 .8 157 2,197 1,051 7,272 35 1.5 20.5 9.8 67.9 .3 Total Backlog 4,291 100.0 5,115 100.0 4,194 100.0 5,611 100.0 10,712 100.0 United States Outside U.S. 3,587 704 83.6 16.4 4,072 1,043 79.6 20.4 2,838 1,356 67.7 32.3 2,520 3,091 44.9 55.1 4,581 6,131 42.7 57.3 Total Backlog 4,291 100.0 5,115 100.0 4,194 100.0 5,611 100.0 10,712 100.0 Backlog includes owners' cost of approximately 1% 1% 8% 34% Fluor earns a fee on this portion of backlog which will not ultimately be recorded as revenues 35% 1981 $ 7,295,853 4,812,191 227,980 7,100,552 $16,166,292 25,858 $1981 % 224 3,097 1,145 11,616 84 1.4 19.2 7.0 71.9 .5 16,166 100.0 6,855 9,311 42.4 57.6 16,166 100.0 33% COAL $ in thousands/ in thousands of short tons/ Year ended October 31, 1986 1985 1984 1983 1982 1981* Revenues Operating Profit (Loss) Manpower Steam Coal Produced Metallurgical Coal Produced Produced Coal Sold Purchased Coal Sold $516,943 $ 49,310 3,307 9,342 2,175 11,620 2,522 $ 475,051 $(223,038) 3,571 7,795 1,730 9,528 2,174 $489,634 $ 14,800 4,709 7,998 2,168 9,982 1,931 $437,455 $ (6,824) 5,145 7,102 2,084 9,192 1,461 $446,883 $ 2,624 5,959 6,873 2,155 8,837 1,741 $130,974 $ 9,155 5,432 5,269 1,787 7,054 3,869 Represents 50% of Massey's operations for ail periods, except manpower which is 100%. ^Financial data for St, Joe Minerals Corporation is included from the date of acquisition, August 3,1981. Other information for St. Joe for the full fiscal year 1981 is shown for comparative purposes only. DR 2801125 OPERATING STATISTICS METALS $ in thousands/Year ended October 31, Revenues Operating Profit (Loss) Manpower 1986 $409,450 $125,389) 6,775 1985 $ 392,746 $(203,800) 7,743 1984 $433,741 $ (3,894) 9,236 1983 $429,000 $ 32,664 8,000 1982 $440,019 $ 46,203 8,232 1981* $108,839 $ 19,716 8,045 INTERNATIONAL MINERALS (in shorttons except as noted) Lead Content of Concentrates Sold Zinc Content of Concentrates Sold Silver Content of Products Sold (Troy Ounces) 28,997 33,218 1,580,443 29,678 36,576 1,434,099 28,725 49,875 1,419,435 35,576 52,140 1,806,250 40,184 62,819 2,140,964 32,933 52,554 1,819,314 DOMESTIC METALS (in shorttons except as noted) Lead Content of Concentrates Produced Lead Metal Sold Zinc Content of Concentrates Produced Zinc Metal Equivalent Sold Iron Pellets Sold (Gross Tons) Silver Content of Products Sold (Troy Ounces) 186,975 193,849 56,434 179,081 585,270 990,768 172,781 177,772 71,602 146,732 1,021,174 716,178 137,618 169,080 76,862 113,738 1,283,262 657,766 215,984 220,823 87,315 100,459 672,341 609,658 207,776 205,573 77,947 75,207 786,354 702,359 168,317 170,638 59,592 46,212 970,682 751,459 GOLD** (in troy ounces except as noted) Gold Content of Products Sold Silver Content of Products Sold Copper Content of Products Sold (Short Tons) 292,614 1,092,379 21,223 290,248 1,007,865 20,055 303,937 1,042,689 19,915 368,787 926,381 16,186 368,081 536,093 8,350 171,023 -- -- ^Financial data for St. Joe Minerals Corporation is included from the date of acquisition, August 3,1981. Other information tor St. Joe for the full fiscal year 1981 is shown for comparative purposes only. ^Reflects 100% of St. Joe Gold Corporation's operations without deduction for minority interest. OTHER* $ in thousands/Year ended October 31, Revenues Operating Profit (Loss) Manpower ^Includes all intercompany eliminations. 1986 S 45,553 $ 963 159 1985 $ 50,113 $ (28,899) 665 1984 $110,501 $(16,136) 1,305 1983 $108,076 $ 17,422 1,399 1982 $115,611 $ 20,788 1,559 1981 $ 97,007 $ 1,903 1,777 DR 2801126 FINANCIAL CONTENTS 22 Management's Discussion and Analysis 26 Selected Financial Data 27 Consolidated Statement of Operations 28 Consolidated Balance Sheet 30 Consolidated Statement of Changes in Financial Position 31 Consolidated Statement of Shareholders' Equity 32 Notes to Consolidated Financial Statements 40 Segment Information 42 Management's Report 43 Independent Auditors' Opinion 44 Mineral Reserves and Operating Statistics 46 Quarterly Financial Data . MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS 0 F OPERATIONS The loss from continuing opera tions was $28 million in 1986 compared with losses of $554 million in 1985 and $7 million in 1984. The related loss per share was $.35 for 1986 compared with $7.00 in 1985 and $.09 for 1984. Revenues from continuing operations increased 14% in 1986 following a 3% decline in 1985. During 1986, the company con tinued to implement its restruc turing plan. In the first quarter approximately 10 percent of the common stock of St. Joe Gold Corporation was sold in a public offering, resulting in net pro ceeds of $36 million and a nontaxable gain of $24 million. Final settlement of the Irvine facility sale transaction occurred in the third quarter and resulted in a pretax gain of $38 million. In the fourth quarter, the com pany sold its real estate subsid iary, Daniel Realty Corporation (DRC), to DRC's management for $21 million, resulting in a pretax gain of $2 million. In addition, during the fourth quarter the company reached an agreement to dispose of its drilling services operations for $18 million, $8 million in cash with the balance in notes. The sale resulted in a pretax loss from disposal of $45 million. ENGINEERING AND CONSTRUCTION Engineering and Construction experienced an operating loss of $76 million in 1986 compared with $85 million in 1985 and an operating profit of $95 million in 1984. Operating results in 1986 reflect higher facility costs on buildings sold and leased back late in the third quarter of 1985, lower margins due to continued severe industry-wide competi tive pressures, and losses in curred on several fixed price DR 2801127 22 construction projects bid under extremely competitive condi tions. Manpower was reduced 17% in 1986 and 11% in 1985, resulting in continuing reduc tions in indirect costs. mm Contract awards for engineering and construction decreased in 1986 due to continued depressed business conditions and intense competition due to over-capacity in the industry. New awards decreased in 1986 to $3.0 billion from $4.5 billion in 1985 and $4.2 billion in 1984. Backlog at Octo ber 31,1986 was $4.3 billion compared with $5.1 billion and $4.2 billion at October 31,1985 and 1984, respectively. During the second quarter of 1986, backlog was increased by $554 million to include the estimated value of up to 36 months of work to be performed under cer tain maintenance contracts. This adjustment was not included in new awards. Late In 1986, an Internal man agement restructuring was completed that combined Fluor Engineers and Daniel Inter national into a single operating organization. The new organiza tion should facilitate increased market penetration and operat ing efficiency. Fluor Constructors continues to be organized and operated independently within the Engineering and Construc tion segment. NATURAL RESOURCES Metals operations incurred an operating loss of $25 million on revenues of $409 million in 1986, compared with an operating loss of $204 million on revenues of $393 million in 1985 and an operating loss of $4 million on revenues of $434 million in 1984. The 1985 operating loss includes a nonrecurring charge of $138 million to write off goodwill associated with the domestic lead operations. Operations in 1986 showed substantial improve ment due to higher gold prices. higher volume and content of gold in products sold, and lower costs in lead, zinc and Argen tine operations. These improve ments were partially offset by lower realized prices for domes tic lead and zinc for the first three quarters of the year. Revenues and operating profit from coal operations in 1986 were $517 million and $49 mil lion, respectively, compared with revenues of $475 million and an operating loss of $223 million in 1985. Revenues and operating profit in 1984 were $490 million and $15 million, respectively. The operating loss for 1985 includes a nonrecurring charge of $212 million related to the reduction to net realizable value of certain of the com pany's coal properties held for disposal. Operations in 1986 were improved due to settle ment, in the first quarter, of a labor dispute that existed DR 2801128 > throughout 1985, lower operat ing costs, and higher volumes which combined to offset lower realized prices experienced dur ing the year. Also, 1986 includes $17 million from reversals of reserves no longer required. OTHER Reduced interest expense re flects the significantly reduced average level of debt outstand ing during 1986 and lower interest rates on outstanding borrowings compared with 1985 and 1984. The effective income tax benefit rate on the loss from continuing operations varies from 46% pri marily due to the recognition of a nontaxable gain on the sale of St. Joe Gold common stock, capital gain rates applied to the gain from final settlement of the Irvine facility sale, partially off set by nondeductible amortiza tion of property, plant and equipment bases differences, and goodwill. BBSS The difference between the effective rate in 1985 and the statutory rate of 46% is primarily due to amortization and write downs of both property, plant and equipment bases differ ences and goodwill, and accru als and losses with no tax benefit FINANCIAL POSITION AND LIQUIDITY Funds provided by continuing operations were $54 million in 1986 compared with funds used of $152 million in 1985. In 1984, funds provided from continuing operations were $48 million. These amounts exclude the impact of the sales of the Irvine facility and the St. Joe Gold common stock, the proceeds of which are included in invest ment activities. In 1986, funds were used for payments to investors consist ing of cash dividends on com mon stock of $32 million and interest, net of tax, of $40 mil lion. Dividends were paid at the rate of $.10 per share per quar ter for 1986. mm Capital expenditures for 1986 were $92 million compared with $121 million in 1985 and $286 million in 1984. In 1986, the majority of capital expenditures related to the metals and coal segments and included acquisi tions of new mining properties, general mine development work, equipment replacements, and plant modifications. In the fourth quarter of 1986 the company issued approximately $250 million of medium-term notes in the U.S., Switzerland, and Germany. Both of the foreign issues have been hedged through currency exchange agreements that fix the obligations in U.S. dollars at effective interest rates of 9.5% for the German borrowing and 9.3% for the Swiss borrowing. Proceeds from these borrowings were used primarily to fund payment of DR 2801129 24 approximately $138 million of federal income tax obligations (including associated interest) which were accelerated as a result of the company's Closing Agreement of December 1984 with the Internal Revenue Serv ice. The balance of the pro ceeds from the debt offerings are being utilized to repay other interest bearing obligations, to fund capital expenditures, and for general corporate purposes. ii Since the net proceeds of the borrowings were used primarily to pay interest-bearing tax obli gations, total interest-bearing obligations did not change sig nificantly. Working capital was $265 million at October 31,1986 compared with $37 million at October 31,1985. This increase of $228 million is primarily due to the borrowings discussed above and a federal income tax refund of approximately $100 million. The tax refund results from the carryback of the 1986 tax loss and is expected to be received during the second quarter of fiscal 1987. The long-term debt to capital ization ratio at October 31,1986 was 35% compared with 20% and 30% at October 31, 1985 and 1984, respectively. At October 31, 1986, all long-term debt bears interest at fixed rates. The company has access to sufficient sources of funds to meet its operating needs. Short and long-term lines of credit are maintained with banks and the company has access to a com mercial paper program which provides adequate operating liquidity. As of October 31,1986, under the terms of the Massey joint venture agreement, net assets of $470 million, including $72 million of working capital, are restricted from distribution without the approval of the part ners. During 1986 the company received cash distributions of $32 million from Massey. As of November 1,1986, the company contributed all of the assets of its domestic lead busi ness to a joint venture. The company's net asset investment of approximately $414 million, including $25 million of working capital, which represents a 57.5 percent interest in the joint venture, will be restricted from distribution without the consent of the partners. The company is affected by in flation but certain factors serve to mitigate its impact. The com pany's position is generally pro tected within its engineering and construction operations due to its ability to recover cost increases as a result of price escalation provisions in many of its contracts. Most of the com pany's natural resources prod ucts are internationally traded commodities and prices for those products are established by factors which are beyond the control of management. How ever, management believes the company's substantial position in natural resources provides a significant hedge against any adverse long-term effects of inflation. OR 280H 30 SELECTED FINANCIAL DATA Fluor Corporation $ in millions, except per share amounts OPERATING RESULTS Revenues from continuing operations Earnings (loss) from continuing operations before income taxes Earnings (loss) from continuing operations Net earnings (loss) Earnings (loss) per share Continuing operations Net earnings (loss) Dividends per share 1986 $4,660.3 (69.7) (28.0) (60.4) (.35) (.76) $ .40 1985 $4,097.2 (591.5) (553.7) (633.3) (7.00) (8.01) $ .40 1984 $4,239.9 (12.1) (6.8) 1.0 (.09) .01 $ .60 1983 $5,079.0 157.0 82.7 27.7 1.05 .35 $ .80 1982 $6,387.3 198.8 99.6 152.8 1.27 1.94 $ .80 1981 $5,149.0 192.9 111.3 158.9 1.98 2.82 $ .80 FINANCIAL POSITION Current assets Current liabilities $ 922.1 656.8 Working capital Property, plant and equipment, net Total assets Capitalization Long-term debt Shareholders' equity 265.3 1,301.8 2,565.4 519.4 950.2 Total capitalization Percent of total capitalization Long-term debt Shareholders' equity Shareholders' equity per common share Common shares outstanding $1,469.6 35.3 64.7 $ 11.99 79,271,954 $1,057.2 1,020.7 36.5 1,433.3 2,796.4 259.1 1,033.9 $1,293.0 20.0 80.0 $ 13.06 79,138,897 $1,025.9 1,016.4 9.5 2,338.2 3,891.6 724.8 1,696.4 $2,421.2 29.9 70.1 $ 21.49 78,945,585 $1,146.0 1,090.2 55.8 2,379.8 4,084.9 720.0 1,747.2 $2,467.2 29.2 70.8 $ 22.19 78,746,717 $1,541.4 1,488.4 53.0 2,493.9 4,701.0 1,009.9 1,776.4 $2,786.3 36.2 63.8 $ 22.68 78,327,685 $1,460.9 1,296.1 164.8 2,527.0 4,491.3 1,104.8 1,683.2 $2,788.0 39.6 60.4 $ 21.55 78,092,814 OTHER DATA New orders received during year Backlog at end of year Capital expenditures Depreciation, depletion and amortization for continuing operations Funds provided from (used by) continuing operations Number of employees $2,992.2 4,291.4 91.6 $4,485.3 5,114.7 121.2 $4,151.3 4,194.2 285.5 $1,244.6 5,610.7 301.8 $2,908.8 10,711.8 525.9 $7,100.6 16,166.3 448.1 123.4 $ 53.6 22,309 150.8 139.7 $ (152.1) 26,958 $ 47.9 32,153 136.8 $ 276.1 34,123 122.1 $ 272.2 43,111 56.9 $ 300.5 44,170 Prior periods have been restated to exclude from continuing operations the drilling services segment, which was discontinued in 1986. St. Joe Minerals Corporation is included on an equity basis for May 1,1981, through August 2,1981, and on a consolidated basis thereafter. See Management's Discussion and Analysis on pages 22 to 25, Consolidated Statement of Operations on page 27, and Notes to Consolidated Financial Statements and Quarterly Financial Data for information relating to significant items affecting the results of operations. DR 2801131 CONSOLIDATED STATEMENT 0 F OPERATIONS Fluor Corporation In thousands, except per share amounts/ Year ended October 31, 1986 REVENUES Engineering and construction services Natural resources Other Iota! revenues $3,688,315 926,393 45,553 4,660,261 COST OF REVENUES Engineering and construction services Natural resources Write-down of investment in certain coal mines Write-off of excess of cost over net assets of acquired businesses allocated to lead operations Other . Total cost of revenues OTHER INCOME AND EXPENSE Corporate administrative and general expense Gain on sale of common stock of St. Joe Gold Corporation Gain on sale of Irvine facility Interest expense (net of capitalized interest of $2,364, $2,645 and $12,822, respectively) Interest income Total costs and expenses LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES INCOME TAX BENEFIT LOSS FROM CONTINUING OPERATIONS 3,759,612 906,672 -- _ 44,741 4,711,025 32,532 (24,102) (37,779) 72,552 (24,241) 4,729,987 (69,726) 41,700 (28,026) DISCONTINUED OPERATIONS Earnings (loss) from operations (net of income tax benefit (expense) of $11,160, $3,943 and $(16,753), respectively) Loss on disposal of discontinued operations (net of income tax benefit of $20,650 and $27,050, respectively) (8,070) (24,347) EARNING S (LOSS) FROM DISCONTINUED OPERATIONS (32,417) EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM Extraordinary item--premium on early extinguishment of debt (net of income tax benefit of $14,508) (60,443) -- NET EARNINGS (LOSS) $ (60,443) EARNINGS (LOSS) PER SHARE Continuing operations Discontinued operations Extraordinary item Net earnings (loss) SHARES USED TO CALCULATE EARNINGS (LOSS) PER SHARE See Notes to Consolidated Financial Statements. $ (.35) (.411 -- $ (.76) 79,248 1985 $3,179,308 867,797 50,113 4,097,218 3,267,177 949,506 211,578 137,989 81,666 4,647,916 34,652 -- (78,834) 111,777 (26,814) 4,688,697 (591,479) 37,807 (553,672) (12,424) (50,867) (63,291) (616,963) (16,361) $ (633,324) $ (7.00) (.801 (.21) $ (8.01) 79,054 1984 $3,205,987 923,375 110,501 4,239,863 3,103,202 912,803 -- _ 133,882 4,149,887 46,361 -- -- 91,561 (35,872) 4,251,937 (12,074) 5,316 (6,758) 7,766 -- 7,766 1,008 -- $ 1,008 $ (.09) .10 -- $ .01 79,057 OB 2801132 27  . ,-;3v CONSOLIDATED BALANCE SHEET $ in thousands/at October 31, ASSETS CURRENT ASSETS Cash and short-term investments Notes receivable Accounts receivable Income taxes receivable Contract work in progress Net assets held for sale Inventories Other current assets Total current assets PROPERTY, PLANT AND EQUIPMENT --AT COST Land Buildings and improvements Machinery and equipment Mining properties and mineral rights Drilling and marine equipment Construction in progress Less accumulated depreciation, depletion and amortization Net property, plant and equipment OTHER ASSETS Excess of cost over net assets of acquired businesses, net of accumulated amortization of $47,610 and $43,446, respectively Other Total other assets 1986 1985 $ 96,331 13,528 340,368 102,000 185,739 12,830 148,106 23,236 922,138 $ 50,702 151,246 350,906 -- 268,788 37,101 173,436 25,058 1,057,237 52,989 228,022 814,333 760,436 -- 19,069 1,874,849 573,028 1,301,821 53,187 219,432 794,803 744,366 138,706 15,774 1,966,268 532,946 1,433,322 230,632 110,802 341,434 $2,565,393 237,757 68,048 305,805 $2,796,364 DR 2801133 Fluor Corporation LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts and notes payable Advance billings on contracts Accrued salaries, wages and benefit plan liabilities Other accrued liabilities Current portion of long-term debt Commercial paper to be retired with proceeds from asset sales Income taxes currently payable Deferred income taxes Total current liabilities LONG-TERM DEBT DUE AFTER ONE YEAR OTHER NONCURRENT LIABILITIES Deferred income taxes Deferred income Other Total other noncurrent liabilities CONTINGENCIES AND COMMITMENTS SHAREHOLDERS' EQUITY Capital Stock Preferred--authorized 20,000,000 shares without par value, none issued Common--authorized 150,000,000 shares of $.621/2 par value; issued and outstanding in 1986--79,271,954 shares and in 1985--79,138,897 shares Additional capital Deficit Unamortized executive stock plan expense Cumulative translation adjustments Total shareholders' equity See Notes to Consolidated Financial Statements. , 1986 1985 $ 261,610 62,261 83,030 206,130 14,667 -- 25,486 3,613 656,797 519,439 $ 367,962 78,521 97,482 228,640 39,698 66,567 111,054 30,774 1,020,698 259,064 93,334 133,888 211,695 438,917 121,237 157,485 203,976 482,698 49,545 1,070,845 (160,022) (6,736) (3,392) 950,240 $2,565,393 49,462 1,069,624 (67,878) (9,429) (7,875) 1,033,904 $2,796,364 DR 2801134 29 a:j CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION Fluor Corporation $inthousands/Year ended October 31, FUNDS PROVIDED FROM OPERATIONS Loss from continuing operations Depreciation, depletion and amortization Interest expense, net of tax Deferred income taxes Gain on sale of Irvine facility, net of tax Gain on sale of common stock of St. Joe Gold Corporation Amortization of deferred gain on asset sales Write-down of investment in certain coal mines Write-off of excess of cost over net assets of acquired businesses Other items, net Funds provided from (used by) continuing operations Earnings (loss) from discontinued operations Depreciation, depletion and amortization Deferred income taxes Interest expense, net of tax Funds provided from (used by) discontinued operations Funds provided from (used by) operations Net decrease (increase) in operating working capital Net funds used by operations PAYMENTS TO INVESTORS Cash dividends paid Interest expense, net of tax Total payments to investors INVESTMENT ACTIVITIES Additions to property, plant and equipment Net book value of property, plant and equipment sold or retired (excluding Irvine facility) Proceeds from sale of Irvine facility, net of tax Proceedsfromsaleof common stock of St. Joe Gold Corporation Decrease in net assets held for sale Decrease (increase) in noncurrent notes receivable Other, net . Net funds provided (utilized) by investment activities FINANCING ACTIVITIES Issuance of long-term debt Reduction of long-term debt Net increase (decrease) in borrowings due currently Proceeds from (retirement of) nonrecourse oil and gas financing Extraordinary item, net of tax Net funds provided (utilized) by financing activities Increase (decrease) in cash and short-term investments Cash and short-term investments at beginning of period Cash and short-term investments at end of period See Notes to Consolidated Financial Statements. 1986 1985 1984 $ (28,026) 123,386 39,178 (7,763) (27,079) (24,102) (23,597) -- -- 1,622 53,619 (32,417) 5,864 (47,301) 1,213 (72,641) (19,022) (85,305) (104,327) $(553,672) 150,786 60,360 (99,169) (55,720) -- (7,822) 211,578 137,989 3,570 (152,100) (63,291) 49,450 (42,614) 2,126 (54,329) (206,429) 72,909 (133,520) $ (6,758) 139,747 49,443 (129,202) -- -- (1,000) -- -- (4,317) 47,913 7,766 55,365 8,752 2,887 74,770 122,683 (149,301) (26,618) (31,701) (40,391) (72,092) (31,561) (62,486) (94,047) (47,281) (52,330) (99,611) (91,619) 104,296 27,079 35,700 24,271 (50,281) 7,205 56,651 (121,216) 630,455 227,460 -- 3,042 (71) 25,624 765,294 (285,514) 131,179 -- -- 86,960 16,326 (1,271) (52,320) 264,983 (4,608) (94,978) -- -- 165,397 45,629 50,702 $ 96,331 158,600 (624,313) (44,593) (55,000) (16,361) (581,667) (43,940) 94,642 $ 50,702 317,755 (312,985) 67,708 55,000 -- 127,478 (51,071) 145,713 $ 94,642 DR 2801135 30 -- :'', '" / > CONSOLtOATEO STATEMENT OF SHAREHOLDERS' EQUITY Fluor Corporation $ in thousands, except per share amounts/ Year ended October 31,1984,1985 and 1986 Common Stock Additional Capital Retained Earnings (Deficit) Unamortized Executive Stock Plan Expense Cumulative Translation Adjustments Total BALANCES AT NOVEMBER 1, 1983 Net earnings Cash dividends ($.60 per share} Exercise of stock options--net Amortization of executive stock plan expense Issuance of restricted stock--net Cumulative translation and related deferred tax adjustments as of November 1,1983 Translation adjustmentfor the period $49,217 88 36 $1,065,431 1,343 $ 645,117 1,008 (47,281) 775 . (1,837) $(12,516) 3,290 (1,084) $ -- $1,747,249 1,008 (47,281) 1,431 3,290 (2731 (3,285) (3,939) (5,122) (3,939) BALANCES AT OCTOBER 31, 1984 Net loss Cash dividends ($.40 pershare) Exercise of stock options--net Amortization of executive stock plan expense Issuance of restricted stock--net Translation adjustmentfor the period 49,341 81 40 1,067,549 1,182 893 597,007 (633,324) (31,561) (10,310) 1,838 (957) (7,224) 1,696,363 (633,324) (31,561) 1,263 (651) 1,838 (24) (651) BALANCES AT OCTOBER 31 , 1985 Net loss Cash dividends ($.40 per share) Exercise of stock options--net Amortization of executive stock plan expense Issuance of restricted stock--net Translation adjustmentfor the period 49,462 67 16 1,069,624 991 230 (67,878) (60,443) (31,701) (9,429) 3,003 (310) (7,875) 1,033,904 (60,443) (31,701) 1,058 4,483 3,003 (64) 4,483 BALANCES AT OCTOBER 31, 1986 $49,545 $1,070,845 $(160,022) $ (6,736) $(3,392) $ 950,240 See Notes to Consolidated Financial Statements. DR 2801136 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fluor Corporation MAJOR ACCOUNTING POLICIES 32 DR 2801137 PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the company and its subsidiaries. The equity method of accounting is used for investments where ownership ranges from 20 percent to 50 percent and for corporate joint ventures. The company consolidates its 50 percent proportionate share of the accounts of Massey Coal Company. Al! significant intercom pany transactions are eliminated. Certain 1985 and 1984 amounts have been reclassified to conform with the 1986 presentation. ENGINEERING AND CONSTRUCTION CONTRACTS The company recognizes revenues on engineering and construction contracts on the percentage-of-completion method, primarily based on contract costs incurred to date compared with total estimated contract costs, and on manhours incurred to date compared with total estimated manhours for the construction of certain power plants. Contracts are segmented between engineering and construction efforts and, accord ingly, gross margin related to each activity is recognized as those sepa rate services are rendered. Changes to total estimated contract costs or manhours and losses, if any, are recognized in the period they are deter mined. Revenues recognized in excess of amounts billed are classified as current assets under contract work in progress. It is anticipated thatthe incurred costs associated with contract work in progress at October 31, 1986, will be billed and collected in 1987. Amounts received from clients in excess of revenues recognized to date are classified as current liabilities under advance billings on contracts. SB EXPLORATION AND DEVELOPMENT Metals--Costs incurred for exploration of minerals are generally expensed as incurred. Development expenditures to bring new mineral properties into production, comprising substantially all surface mine development and initial underground installations, are capitalized in mining properties and charged to expense over periods approximating the life ofthe mine, on the straight-line method for base metals and on the unit-of-production method for precious metals. Subsequent maintenance and underground development expenditures are charged to expense as incurred. Coal--Development costs of specific coal properties, when expected to be significant, are capitalized in mining properties and charged to expense on the unit-of-production method. mm ' DEPRECIATION AND AMORTIZATION Depreciation of assets other than mining properties and mineral rights is provided using principally the straight-line method to amortize the cost ofthe assets over their estimated useful lives. Leasehold improvements are amortized over the lives ofthe respective leases. The excess of cost over net assets of acquired businesses is being amortized on the straight-line method, primarily over 40 years. mm INCOME TAXES Deferred income taxes are provided for items recognized in different periods for financial and tax reporting purposes. Such timing differences include the use ofthe completed-contract method of accounting for cer tain contracts, capitalized interest, accelerated depreciation, various accruals and deferred gains on property sales. Investment and other tax credits are applied as a reduction of the provision for federal income taxes under the flow-through method of accounting. EARNINGS (LOSSI PER SHARE Earnings (loss) per share are based on the weighted average number of common and common equivalent shares outstanding in each period. Common equivalent shares include the potential dilution from the exer cise of stock options when the effect of such options is dilutive. sm CONSOLIDATED STATEMENT 0 F CHANGES I N FINANCIAL POSITION FOREIGN CURRENCY TRANSLATION The effects of translating foreign subsidiaries' financial statements are recorded as a separate component of shareholders' equity. Changes in the cumulative translation adjustments were as follows: $ in thousands/Year ended October 31, 1986 1985 1984 Balance at beginning of year Translation adjustments Deferred income taxes on translation adjustments $17,875) 8,301 (3,818) $(7,224) (1,421) 770 $(3,285) (7,294) 3,355 Balance at end of year $13,392) $(7,875) $(7,224) -- The company utilizes a cash flow format to present its Consolidated Statement of Changes in Financial Position. Funds provided or used by operations include the effects of current and noncurrent deferred in come taxes and exclude interest expense, net of tax. Short-term borrow ings have been reflected as part of financing activities and interest expense, net of tax, has been reflected as funds used for payments to investors. Changes in operating working capital as shown in the Consolidated Statement of Changes in Financial Position comprise the following: $ in thousands/Year ended October 31, 1986 1985 1984 Decrease (increase) in: Notes, accounts and income taxes receivable Contract work in progress and inventory Other current assets Increase (decrease) in: Accounts payable and accrued liabilities Advance billings on contracts Income taxes currently payable $ 46,256 108,379 1,822 $ (63,268) (37,323) 22,252 $ (17,242) (7,413) 6,747 (139,934) (16,260) (85,568) 174,600 968 (24,320) (99,487) (65,896) 33,990 Net decrease (increase) in operating working capital $ (85,305) $ 72,909 $(149,301) INVENTORIES RETIREMENT BENEFITS Inventories comprise the following: $ in thousands/at 0ctober31, Coal, metals and processed minerals Supplies and other Total 1986 $ 77,335 70,771 $ 148,106 1985 $ 102,428 71,008 $ 173,436 Inventories are stated at the lower of cost (using the last-in, first-out (LIFO) method, except for inventories of supplies and other which are on the average cost method) or net realizable value. Certain subsidiaries of the company have noncontributory defined bene fit plans. Under these plans payments to retired employees are generally based upon their length of service and a percentage of qualifying com pensation. These plans are generally funded at the minimum annual amount required by applicable regulations. DR 2801138 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued mm RETIREMENT BENEFITS continued Fluor Corporation Net periodic pension cost includes the following components: $ in thousands/Vear ended October 31, Service costs--benefits earned during the period Interest cost on projected benefit obligation Net amortization and deferral Less--income and gain on assets invested Net periodic pension cost Early retirement program cost Pension expense 1986 $ 6,832 14,462 22,572 (39,777) 4,089 2,812 $ 6,901 The following assumptions were used in the determination of net periodic pension cost: Discount rates Rates of increase in compensation levels Expected long-term rate of return on assets 8-9 % 5-7%% 8-9 % The company adopted Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions" in 1986. The effect of this change was to decrease net pension expense approximately $2,900,000 for the year ended October 31,1986. Pension expense for defined benefit plans was $9,300,000, and $10,500,000 for 1985 and 1984, respectively. The following table sets forth the funded status of the defined benefit plans: $ in thousands/at October 31, 1986 1985 Actuarial present value of benefit obligations: Vested benefit obligation Nonvested benefit obligation $ 141,355 9,784 $ 131 901 9,024 Accumulated benefit obligation S 151,139 $ 140,925 Plan assets atfair values (primarily listed stocks and bonds) Projected benefit obligation Plan assets in excess of projected benefit obligation Unrecognized net (gain) loss Unrecognized net asset at implementation Pension liability recognized in the Consolidated Balance Sheet $217,748 184,125 33,623 (21,648) (18,983) $ (7,008) $184,474 170,537 13,937 (20,259) $ (6,322) Massey Coal Company participates in multiemployer defined benefit pension plans for its union employees. Pension expense related to.these plans was $1,000,000, $900,000, and $4,200,000 in 1986,1985 and 1984, respectively. The company also sponsors defined contribution retirement plans covering eligible employees. Contributions are based on a percentage of employees' compensation. Expense recognized for these plans approximated $36,400,000, $39,800,000 and $40,300,000 in 1986,1985 and 1984, respectively. The company and certain of its subsidiaries provide health care and life insurance benefits for retired employees. The cost of retiree health care and life insurance benefits is recognized as expense when paid. These costs were $3,500,000 and $3,000,000 for 1986 and 1985, respectively. /** i | DR 2801139 34 SSI DISCONTINUED OPERATIONS LONG -TERM DEBT 35 During the fourth quarter of 1986, the company adopted a plan to dispose of its drilling services segment. During November 1986, the operation was sold for $17,500,000, $7,500,000 in cash with the balance payable in equal installments over the three years ending in 1994. Revenues from drilling operations were $18,400,000, $71,200,000 and $61,900,000 in 1986, 1985 and 1984, respectively. During 1985, the company adopted a plan to dispose of its oil and gas segment for an aggregate sales price of $270,000,000. The company com pleted the disposition of this segment during 1986. Revenues from oil and gas operations were $84,900,000 and $99,400,000 in 1985 and 1984, respectively. The following table summarizes the earnings (loss) from discontinued operations: $in thousands/Year ended October31, 1986 1985 1984 Earnings (loss) from operations: Oil and gas (net of income tax expense of $11,750 in 1985 and $19,959 in 1984) Drilling services (net of income tax benefit of $11,160, $15,693 and $3,206, respectively) $ _ $ 7,187 $11,368 (8,070) (19,611) (3,602) Loss on disposal: Oil and gas (net of income tax benefit of $27,050) Drilling services (net of income tax benefit of $20,650) (8,070) (12,424) -- (24,347) (50,867) -- 7,766 -- Earnings (loss) from discontinued operations $(32,417) $(63,291) $ 7,766 Long-term debt comprises: $ in thousands/at October 31, Pollution control and industrial revenue bonds, 6% to 8.9%, due in varying amounts from 1989 through 2013 (net of unamortized discount of $7,290 and $7,788, respectively) Notes, effective interest rate 9.7%, due in 1993 Swiss Franc financing, with a currency exchange agreement fixing the repayments in U.S. dollars at an effective interest rate of 9.3%, due in 1993 Deutsche mark financing, with a currency exchange agreement fixing the repayments in U.S. dollars at an effective interest rate of 9.5%, due in 1996 Notes, effective interest rate 1214%, due in installments through 1998 (net of unamortized discount of $8,651 and $9,631, respectively) Eurodollar zero coupon debentures, effective interest rate 14%, due in 1990 (net of unamortized discount of $18,988 and $23,101, respectively) Serial zero coupon notes, effective interest rate 14.3%, due in installments through 1989 (net of unamortized discount of $6,815 and $10,515, respectively! Term loans, 9.3%, due in installments through 2000 Secured credit agreement, 1%% above LIBOR Other notes and mortgages Less: Current portion Long-term debt due after one year 1986 1985 $114,289 100,000 _$113,791 90,964 74,019 51,349 50,369 32,471 28,358 25,680 25,100 -- 20,234 534,106 14,667 $519,439 29,480 26,800 21,250 28,714 298,762 39,698 $259,064 Maturities relating to long-term debt are as follows for the years ending October31:1988, $17,400,000; 1989, $21,800,000; 1990, $43,500,000; and 1991, $8,100,000. DR 2801140 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued Fluor Corporation LONG-TERM DEBT continued INCOME TAXES Pollution control bonds of $38,100,000 are subject to sinking fund install ments commencing in 1989. $73,100,000 of the industrial revenue bonds represent the company's portion of such bonds issued for facilities of Massey Coal Company. All ofthe industrial revenue bonds are subject to mandatory redemption if certain tax exemption features ofthe bonds are disallowed. At October 31,1986, the company had long-term lines of credit with banks from which it may borrow up to a maximum of $325,000,000 under revolving lines of credit which convert to four-year term loans. Subsequentto October 31,1986 the company lowered its long-term lines of credit to $230,000,000. The company may use these lines of credit to sup port commercial paper borrowings and unsecured promissory notes. Commitment fees are paid on unused portions ofthese lines. At October 31,1986, no amounts were outstanding under these lines. At October 31, 1986, the company had $122,600,000 in unused short-term lines of credit. Borrowings under lines of credit and revolving credit agreements bear interest at prime, 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. All long-term debt (including current portion) outstanding at October 31,1986 bears interest at fixed rates. The net book value of assets securing long-term debt of $50,300,000 was approximately $22,400,000 at October 31,1986. During 1985, the company utilized a major portion ofthe cash proceeds from asset sales to extinguish long-term debt prior to scheduled maturi ties. A total of $304,800,000 of long-term debt was extinguished prior to scheduled maturities at a net after-tax premium of $16,361,000. This pre mium is classified as an extraordinary item in the 1985 Consolidated Statement of Operations. During 1985, the company completed an "in-substance defeasance" on $63,100,000 of 14% Eurodollar notes by placing in an irrevocable trust $72,900,000 of U.S. government securities to be used solely for satisfying scheduled payments of both interest and principal on the notes. During September 1986 the notes were redeemed. The income tax benefit (expense) on loss from continuing operations in the Consolidated Statement of Operations is as follows: $ in thousands/Year ended October 31, 1986 1985 1984 Current Federal Foreign State and local $ 66,363 (34,981) (8,246) $ (74,610) (16,559) (11,304) $ (95,324) (13,873) (13,288) Total current 23,136 (102,473) (122,485) Deferred Federal Foreign State and local 9,896 5,999 2,669 144,034 (8,636) 4,882 143,007 (19,371) 4,165 Total deferred 18,564 140,280 127,801 Total income tax benefit $41,700 $ 37,807 $ 5,316 DR 2801141 36 warn ' A reconciliation of statutory federal income tax to the income tax benefit on loss from continuing operations follows: $ in thousands/Year ended October 31, 1986 1985 1984 Statutory federal income tax benefit at 46% Reductions (increases) in taxes resulting from: Capital gain rate differential Nontaxable gain on sale of St. Joe Gold common stock Effect of foreign tax rates Amortization and write-down of property, plant and equipment bases differences Earnings (losses) without tax effect Depletion Indefinitely reinvested foreign earnings Investment and other tax credits Amortization and write-off of excess of cost over net assets of acquired businesses State income taxes Accruals without tax effect Safe harbor tax leases Other--net $32,074 $272,080 $ 5,554 13,210 18,022 11,087 (9,989) -- (12,386) (8,314) 7,787 7,088 (7,000) 5,312 (47,092) (85,540) 506 -- 2,461 (3,142) (1,392) (1,093) -- (3,928) (84,132) (4,093) (14,486) -- (7,533) 589 -- (684) (8,798) (1,205) 6,363 5,267 4,121 (5,069) (3,019) 1,947 1,260 (1,010) Total $41,700 $ 37,807 $ 5,316 The difference between the statutory federal income tax rate and the actual tax rates applicable to discontinued operations is primarily attributable to the effect of foreign taxes, losses without tax benefit, and capital gain rates. The rate difference applicable to the disposal of discontinued operations is primarily attributable to capital gain rates. Deferred income tax benefit (expense) has been provided for timing differences from continuing operations as follows: $ in thousands/Year ended October 31, 1986 1985 1984 Residual tax on undistributed foreign earnings Accruals not currently reportable for tax purposes Use of different methods of accounting for construction contracts Accelerated depreciation Depreciation, depletion and amortization of natural resource properties Deferred gains on property sales Capitalized interest Other--net Total $14,652 7,776 (4,033) (3,789) 3,710 811 107 (670) $18,564 $ (4,677) 27,202 91,664 9,019 (2,976) 16,745 10,870 (7,567) $140,280 $ (3,635) 1,094 152,321 (6,831) (11,894) (1,514) (3,378) 1,638 $127,801 United States and foreign earnings (losses) from continuing operations before income taxes are as follows: $ in thousands/Year ended October 31, 1986 . 1985 1984 United States Foreign $(112,630) 42,904 $(604,790) 13,311 $(77,063) 64,989 Total $ (69,726) $(591,479) $(12,074) Residual income taxes have not been provided on approximately $42,200,000 of undistributed earnings of certain foreign subsidiaries at October 31,1986 because the company intends to reinvest these earnings indefinitely. 37 DR 2801142 msk NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued INCOME TAXES continued LEASE OBLIGATIONS PROVISION FOR LOSSES ON REVALUATION OF LEAD AND COAL OPERATIONS Fluor Corporation a ' - - Foreign tax credit carryforwards of approximately $35,900,000 are avail able to reduce future federal income taxes. If not used, the credits will ex pire as follows: 1987, $300,000; 1988, $10,200,000; 1989, $14,000,000; 1990, none; and 1991, $11,400,000. The Internal Revenue Service (IRS) has completed its examination of the company's federal income tax returns for the fiscal years 1977 through 1979 and those of St. Joe Minerals Corporation through August 3,1981, the date of acquisition by the company. The company is contesting certain issues raised by the IRS. Examinations of fiscal years 1980 through 1983 have commenced and no material adjustments have yet been pro posed by the IRS. Management believes thatthe resolution of all tax issues will not have a material adverse effect on the company's consoli dated financial position or results of operations. Most of the provisions of the Tax Reform Act of 1986 are not applicable to the company until fiscal year 1988. The new tax law is not expected to have a material effect on the consolidated financial position or results of operations of the company. Further, the Proposed Statement of Financial Accounting Standards--"Accounting for Income Taxes" would not re quire material adjustmenttothe company's deferred income tax liabilities. Total rental expense amounted to $93,000,000, $81,600,000 and $61,100,000 in 1986,1985 and 1984, respectively. The company's lease obligations relate primarily to engineering and office facilities, data processing equipment, equipment used in connection with long-term construction contracts and other personal property. The company was obligated under noncancellable leases for minimum rentals as follows: $ in thousands/at October 31,1986 Gross Present Value* 1987 1988 1989 1990 1991 Thereafter $ 81,564 79,921 71,996 64,956 58,202 517,132 $ 81,564 72,656 59,497 48,802 39,752 182,129 Total $873,771 $484,400 *The present value of lease obligations is presented as supplementary information to reflect the impact on future lease commitments of the time-value of money, using a discount rate of ten percent. During 1985, the company reviewed the long-term business prospects of the lead business. Based on the deterioration in lead sales and operating profits since the acquisition of St. Joe in 1981 and prospects for the domestic lead business, the excess of cost over net assets acquired allocated to lead operations of $138,000,000 was written off in the fourth quarter. In October 1985, the company wrote down its investment in certain Massey Coal Company mines to net realizable value, resulting in a charge to operations of $212,000,000, consisting of reductions in property carry ing values, provisions for disposal and a write-off of the allocated good will. The company is continuing to pursue disposition of certain ofthese mines. Based upon further review of mines identified in 1985 for disposal, a decision was made in 1986 to retain certain ofthese mines and, accord ingly, provisions for disposal of $17,000,000 were reversed and are includ ed in 1986 results of operations. OR 2801143 M STOCK PLANS sale o F assets 39 The company has five executive stock plans, the 1971 Fluor Stock Option Plan, the 1977 and 1981 Fluor Executive Stock Plans, the 1982 Fluor Execu tive Stock Option Plan, and the St. Joe 1972 Non-Qualified Stock Option Plan, assumed on the date of the acquisition of St. Joe. These plans pro vide for grants of nonqualified or incentive options at prices equal to the fair market value of the company's common stock at the date of grant. The 1977 and 1981 Plans also provide for rights to acquire shares under restricted stock agreements at $.33% per share under the 1977 Plan and at no charge under the 1981 Plan. Upon termination other than for reason of retirement, death or permanent disability of the recipient, the stock must be returned to the company for the amount originally paid, if any. At October 31,1986, a total of 1,407,358 restricted shares had been awarded and a total of 18,925 shares were available for award as restricted stock. In addition, the company has the 1979 and 1980 Fluor Stock Apprecia tion Rights Plans. On exercise, the holder of the rights receives the ex cess of market value of the rights on exercise date over the market value of the rights on grant date. Such market values are equal to the market value of the company's common stock. Changes in marketvalue are accounted for currently as compensation expense. Options and stock appreciation rights are generally exercisable one year after the date of grant or in installments of twenty-five percent per year commencing one year from the date of grant. All options expire ten years after the date of grant. With respect to grants under St. Joe's 1972 Plan, the optionee can elect to receive, in lieu of any or all shares, any combination of cash and shares having an aggregate value equal to the excess of market value of the underlying shares over the option price thereof. The following table summarizes stock option and stock appreciation rights ("SAR") activity: Shares Price Per Share SAR Value Per Right Outstanding at October 31,1984 Granted Expired or cancelled Exercised 2.343,891 1,074,717 (94,812) (246,141) $ 6-37 16-17 17-34 6-18 448,919 420,826 (20,932) (1,825) $17-34 16-18 17-34 18 Outstanding at October 31,1985 Granted* Expired or cancelled* Exercised 3,077,655 885,053 (1,198,723) (129,095) 11 37 13 16 11-37 11-22 846,988 584,515 (658,155) (4,549) 16-34 13 16-34 18 Outstanding at October 31,1986 2,634,890 $11-34 768,799 $13-34 Exercisable at: October 31,1985 October 31,1986 Available for grant at: October 31,1985 October 31,1986 1,835,557 1,758,691 622,956 872,093 $11-37 $11-34 286,116 195,208 185,661 259,301 $17-34 $13-34 Includes 882,053 shares and 584,515 SARs cancelled in 1986 at prices ranging from $16 to $34, all of which were regranted at $13. During 1985, the company completed sale and leaseback transactions for its Irvine, California headquarters and engineering center facility for $305,000,000, its Sugar Land, Texas engineering center for $161,000,000, DR 2801144 XKK3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued fissa SALE 0 F ASSETS continued CONTINGENCIES, COMMITMENTS AND RESTRICTIONS SUBSEQUENT EVENT OPERATIONS BY BUSINESS SEGMENT AND GEOGRAPHIC AREA Fluor Corporation * wm its engineering facility in Greenville, South Carolina for $43,000,000 and its Melbourne, Australia office building for $11,000,000. The sale of the Irvine facility resulted in a pre-tax gain of $202,000,000, of which $79,000,000 was included in the results of operations for the year ended October 31, 1985. The remainder of $123,000,000 is being recognized over the lease back period. In 1986 the company recognized an additional pretax gain of $38,000,000, relating to the completion of the Irvine facility sale. During the fourth quarter of fiscal 1986, the company sold its real estate subsidiary, Daniel Realty Corporation (DRC), to DRC's management for $21,000,000, resulting in a pretax gain of $2,000,000. The company is 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 contract coverage. In the opinion of management, finalization of these matters will not have a material adverse effect on the company's consolidated financial position or results of operations. At October 31,1986, $480,000,000 of net assets of subsidiaries, including $72,000,000 of working capital, have restrictions which affect the ability to transfer them to the parent company in the form of loans, advances, or dividends. A substantial portion ofthese restricted net assets relate to the requirement of the Massey Coal Company joint venture agreement to obtain approval of all parties prior to the transfer of joint venture assets. Effective November 1,1986, the company contributed all of the assets of its domestic lead business to a joint venture with Homestake Mining Company. The joint venture, named The Doe Run Company, is owned 57.5% by Fluor and 42.5% by Homestake. Under the terms of the joint venture agreement, Fluor's net asset in vestment in its domestic lead business at November 1,1986 of approxi mately $414,000,000, including $25,000,000 of working capital, will be restricted from distribution without the consent of the partners. The engineering and construction business segment includes the sub sidiaries engaged in the design, engineering, procurement, construction and maintenance of complex facilities for industrial, commercial, utility, natural resource, energy and government clients. The coal business seg ment consists of the company's interest in Massey Coal Company. The metals business segment includes the subsidiaries engaged in the min ing and processing of lead, zinc, gold and other metals. Grouped in other are those businesses that comprise less than 10 percent ofthe revenues, operating profits and identifiable assets of all business segments combined. Identifiable assets are those tangible and intangible assets used in the operation of each ofthe business segments and geographic areas. Corporate assets are principally cash, short-term investments and receivables. Sales to customers in foreign countries from domestic operations com prise less than 10 percent of total revenues in each of the last three years Contracts with one major customer accounted for $573,800,000 or 16 percent of 1986 engineering and construction revenues. In 1985 and 1984 no single customer accounted for more than 10 percent of total revenues. 40 DR 2801H5 OPERATIONS BY BUSINESS SEGMENT $ in millions Engineering and Construction Coal Metals Other Continuing operations $ in millions Engineering and Construction Coal Metals Corporate and Other Continuing operations Discontinued operations OPERATIONS BY GEOGRAPHIC AREA $ in millions United States Middle East South America Africa Europe Other 1986 $3,688.3 516.9 409.5 45.6 $4,660.3 1985 $3,179.3 475.1 392.7 50.1 $4,097.2 Revenues 1984 $3,206.0 489.6 433.7 110.6 $4,239.9 1986 $(75.6) 49.3 (25.4) 1.0 $(50.7) Operating Profit (Loss) 1985 1984 $ (84.9) (223.0)<> (203.8)(bl (28.9) $94.6 14.8 (3.9) (16.1) $(540.6) $89.4 Identifiable Assets 1986 1985 1984 $ 582.3 789.8 940.9 239.6 $ 679.6 803.5 989.3 98.5 $ 949.0 999.7 1,208.5 168.8 2,552.6 12.8 2,570.9 225.5 3,326.0 565.6 $2,565.4 $2,796.4 $3,891.6 Capital Expenditures 1986 1985 1984 $25.6 26.9 35.2 3.4 $ 14.1 27.4 36.6 7.8 $ 84.4 83.6 56.2 5.5 91.1 85.9 229.7 .5 35.3 55.8 $91.6 $121.2 $285.5 Depreciation, Depletion and Amortization 1986 1985 1984 $ 21.3 37.3 61.4 3.4 $ 27.1 48.0 66.3 9.4 $ 30.4 42.8 63.1 3.4 123.4 5.9 150.8 49.4 139.7 55.5 $129.3 $200.2 $195.2 Revenues 1986 1985 1984 $3,945.0 91.6 138.9 57.9 304.9 122.0 $3,397.4 106.5 125.7 83.0 269.3 115.3 $3,256.8 293.1 155.1 97.1 234.0 203.8 $4,660.3 $4,097.2 $4,239.9 Operating Profit (Loss) 1986 1985 1984 $ (79.4) $(528.1) .3 1.2 31.6 10.7 2.7 (22.8) 1.6 (17.9) (7.5) 16.3 $45.9 8.7 39.1 (.4) (.9) (3.0) $ (50.7) $ (540.6) $89.4 Identifiable Assets^ 1986 1985 1984 $2,062.2 59.6 312.2 -- 73.8 57.6 $2,284.9 54.0 272.7 42.5 93.9 48.4 $3,141.4 98.9 304.4 61.6 141.4 143.9 $2,565.4 $2,796.4 $3,891.6 (a)lncludes a charge of $212,000,000 consisting of reductions in property carrying values, a provision for disposal of certain coal properties and a write-off of the allocated goodwill. (^Includes a charge of $138,000,000 relating to the write-off of goodwill allocated to lead operations. (^Identifiable assets of discontinued operations by geographic area are included in the United States. The following table reconciles business segment operating profit (loss) with the loss from continuing operations before income tax: Sin millions/Year ended October31, 1986 1985 1984 Operating profit (loss) from continuing operations Interest--net Gain on sale of Irvine facility Gain on sale of St. Joe Gold common stock Minority interests Corporate administrative and general expense Other items, net $(50.7) (48.3) 37.8 24.1 (3.5) (32.5) 3.4 $(540.6) (85.0) 78.8 -- (2.8) (34.7) (7.2) $89.4 (55.7) -- -- (7.1) (46.4) 7.7 Loss from continuing operations before income tax $(69.7) $(591.5) $(12.1) dr 2801 41  Shareholders Fluor Corporation MANAGEMENT'S REPORT The company is responsible for preparation of the accompanying con solidated balance sheet and the related consolidated statements of oper ations, changes in financial position and shareholders' equity. They have been prepared in conformity with generally accepted accounting princi ples, which have been applied on a consistent basis, and management believes that they present fairly the company's consolidated financial position and results of operations. The integrity of the information pre sented in the financial statements, including estimates and judgments relating to matters not concluded by fiscal year end, is the responsibility of management To fulfill this responsibility, an accounting system and related systems of internal controls, designed to protect the company's assets and properly record transactions and events as they take place, has been developed and maintained. This system of internal controls is supported by an extensive program of internal audits and tested and evaluated by the independent auditors in connection with their annual audit. The Board of Directors pursues its responsibility for financial informa tion and review through an Audit Committee of Directors who are not employees. The internal auditors and the independent auditors have full and free access to the Committee. Periodically the Committee meets with them without management present to discuss the results of their exami nations, the adequacy of internal accounting controls and the quality of financial reporting. 42 DR 2801147 - 4i Board of Directors and Shareholders Fluor Corporation EISI IN DEPENDENT AUDITORS' OPINION mm ; We have examined the accompanying consolidated balance sheet of Fluor Corporation at October 31,1986 and 1985, and the related consoli dated statements of operations, changes in financial position and share holders'equity for each of the three years in the period ended October 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we consid ered necessary in the circumstances. The accounts of Massey Coal Company, a 50% owned joint venture, were examined by other indepen dent auditors; insofar as our opinion on the consolidated financial state ments relates to such assets and operations, which constituted 19% and 11% in 1986,17% and 11% in 1985 and 14% and 11% in 1984 of consolidated assets and revenues, respectively, it is based solely on their reports. In our opinion, based on our examinations and the reports of other in dependent auditors, the accompanying consolidated financial statements present fairly the consolidated financial position of Fluor Corporation at October 31,1986 and 1985, and the consolidated results of operations and changes in financial position for each of the three years in the period ended October 31,1986, in conformity with generallyaccepted accounting principles applied on a consistent basis during the period. Orange County, California Decembers, 1986 DR 2801148 43 MBNH MINERAL RESERVES AND OPERATING STATISTICS unaudited Fluor Corporation Information relating to mineral reserves and milling, production and realized product prices follows: 1986 1985 Short tons and troy ounces in thousands United States Argentina Chile(b) United States Argentina Chile(h) Reserves (tons)*'* Lead Zinc Iron Ore Metallurgical Coal Steam Coal Foreign Milling Ore Direct Smelting Ore Heap Leach Ore 62.302(a) 3,77Kb) 183,468<a) 92,749(b/0 444,158*/c) 5.237(b) 6,102(b) 511b) 3.106(b) 62.573(a) 4.147(b) 184.643(a) 160,927(8/) 375,497<b/d 5,305(b) 5.178(b) 42(b) Average Grade of Ore Reserves^) Lead Zinc Iron Ore Copper Direct Smelting Ore--Silver Direct Smelting Ore--Gold Foreign Milling Ore--Silver Foreign Milling Ore--Gold Heap Leach Ore--Gold 4.9 5.6 12.7 7.3 55.5 4.5 3.4 5.3 3.5 2.8 .2 .1 5.0 5.7 13.6 7.1 55.5 4.8 4.1 4.5 3.6 3.2 0.3 Ore Milled (tons) Lead Zinc Iron Ore Foreign Milling Ore 3,573 283 1,532 642 708 3,536 586 1,982 636 666 Metal Content of Concentrates Produced (tons)(f> Lead Zinc Iron Ore Copper Direct Smelting Ore--Silver Direct Smelting Ore--Gold Foreign Milling Ore--Silver Foreign Milling Ore--Gold 187 30 56 37 666 20 57 104 1,608 1,006 177 173 29 72 35 800 1,448 19 81 125 914 170 Coal Produced (tons)(c> Metallurgical Steam ~-i- 2,175 9,342 1,730 7,795 Average Realized Prices (per ton) Lead Metal Zinc Metal Zinc Concentrates Iron Ore Pellets Lead Concentrates Copper Concentrates Metallurgical Coal Steam Coal Gold/Silver Bearing Copper Concentrates Dearsenified Gold/Silver Bearing Copper Concentrates Core Bullion (per kilogram) Direct Shipping Ore $387 675 30 35 $ 37 $207 $330<g) $ 440 859 4,095 $1,500 $377 816 32 39 $ 41 $191 $328(9) $ 513 946 1,943 $1,201 (a) Proven. (b> Proven and Probable. (cl Represents proportionate share of reserves and production of Massey Coal Company. Does not include proportionate share of reserves related to the company's 10 percent interest in Peabody Holding Company, which was sold in 1983. <d> Represents proportionate share of reserves of joint venture. All of the company's Australian mining operations were sold during the first quarter of 1985. DR 2801149 1984 United States Argentina Australia^) Chile(b) 63,1881a) 7,861 (b) 186,1741a) 150,952(b/d 380,897(b/ci 5.794(b) 808(a) 4,984(b) 53(b) 1983 United States Argentina Australia*^ Chile<h> 62.056(a) 8,378(b) 187,888(3) 99,083(b/c) 420,253<b/d 6,22Kb) 1.296(b) 5.048(b) 66(b) 1982 United States Argentina Australia^) Chile<h) 62,2940) 10.063(b) 196.484(a) 142,836<b/c) 386,188(b/d 6.494(b) 2.094(b) 4.694(b) 69(b) 5.0 6.0 2.8 11.1 6.9 7.8 55.5 2.0 5.0 4.3 5.9 3.6 1.0 3.4 0.3 5.0 5.8 2.9 11.3 6.9 8.8 55.5 1.8 5.0 3.8 6.8 3.5 1.2 3.6 0.3 5.0 6.0 3.2 10.9 6.9 9.5 56.0 1.9 5.1 3.3 7.3 3.6 1.4 3.6 0.3 2,936 739 2,191 634 334 577 4,599 765 1,230 668 344 544 4,590 684 1,487 668 392 423 138 30 77 36 955 1,422 2,168 7,998 5 18 4 19 57 119 305 936 161 ... - 216 32 88 37 530 1,564 2,084 7,102 6 22 4 16 60 206 342 855 170 208 34 78 37 643 1,695 2,155 6,873 8 26 48 61 236 464 455 145 $494 950 427(g) 33 40 $ 40 $208 $570(s) $177 52 $132 $391 772 357(g) 25 43 $ 39 $197 $580fg) $142 36 $185 $520 746 313(g) 32 48 $ 40 $232 $501 (g> $171 81 $184 $ 589 $1,096 1,178 3,795 $1,660 1,939 2,905 $2,930 (e)Stated as % except silver and gold which are stated in troy ounces per ton. (OStated in tons except silver and gold which are stated in troy ounces. (g)Price reflects silver content in concentrates. (b)Reflects 100% of Chilean operations without deduction of minority interest. (')Does not include Yuba Placer Gold's 381,000 troy ounces of gold reserves or Brazilian tin reserves of approximately 10,000 tons. $1,427 2,607 3,668 $2,546 45 DR 2801150 ''srsM?> r7 -7 - ' ',..7 .tv!': x'77i;777%7:777| r; S _ QUARTERLY FINANCIAL DATA unaudited I - The following is a summary of the quarterly results of operations: 19 8 6 S in thousands, except per share amounts First Quarter Revenues from continuing operations Gross margin (loss) Earnings (loss) from continuing operations before income taxes Earnings (loss) from continuing operations Earnings (loss) from discontinued operations: Operations Disposal Net earnings (loss) Earnings (loss) per share: Continuing operations Discontinued operations Net earnings (loss) $1,131,821 (3,888) 313 7,329 (693) 6,636 .09 (.01) $ .08 Second Quarier $1,363,967 (535) (18,190) (9,518) (2,102) (11,620) (.12) (.03) $ (.15) Third Quarter $1,048,693 (26,196) (9,393) 2,946 (1,849) 1,097 .04 (.02) $ .02 Fourth Quarter $1,065,780 (20,145) (42,456) (28,783) (3,426) (24,347) (56,556) (.36) (.35) $ (.71) 1 9 8 5 $ in thousands, except per share amounts Revenues from continuing operations Gross margin (loss) Earnings (loss) from continuing operations before income taxes Earnings (loss) from continuing operations Earnings (toss) from discontinued operations: Operations Disposal Extraordinary item Net earnings (loss) Earnings (loss) per share: Continuing operations Discontinued operations Extraordinary item Net earnings (loss) First Quarter $ 908,452 (21,856) (55,275) (35,037) 2,472 -- -- (32,565) (.44) .03 -- $ (.41) Second Quarter $1,084,931 (26,822) (63,022) (43,656) Third Quarter^* $ 958,017 (25,972) 23,185 16,874 Fourth Quarter^! $1,145,818 (476,048) (496,367) (491,853) 4,199 _ -- (39,457) . (1,637) -- (6,642) 8,595 (17,458) (50,867) (9,719) (569,897) (-55) .05 -- $ (.50) .21 (.02) (.08) $ .11 (6.22) (.86) (.13) $ (7.21) <a(Third Quarter 1985 earnings include a pretax gain of $78,834,000 resulting from the company's sale of its Irvine, California headquarters and engineering center facility. (b)Fourth Quarter 1985 results include pretax charges of $419,057,000 relating to the company's restructuring activities, $47,184,000 of pretax nonrecurring adjustments and a lower than expected tax benefit on the loss from continuing operations. COMMON STOCK AND DIVIDEND INFORMATION The following table sets forth for the periods indicated the cash dividends paid per share of common stock and the high and low sales prices of such common stock as reported in the Consolidated Transactions Reporting System. FISCAL 1986 First Quarter Second Quarter Third Quarter Fourth Quarter Dividends Per Share $.10 .10 .10 .10 $.40 FISCAL 1985 First Quarter Second Quarter Third Quarter Fourth Quarter $.10 .10 .10 .10 $.40 46 Price Range High Low $16Va 18% 1914 15% $13% 15 12 12 $19 20Va 19% 18% $14% 17% 16% 13% 1 DR 2801151 : DIRECTORS David S. Tappan, Jr. Chairman of the Board and Chief Executive Officer (1965) Caroline L Ahmanson Chairman of the Board of Caroline Leonetti, Ltd., Director of The Wait Disney Company (1985) Hugh K. Coble Group President, Fluor Daniel International Operations (1984) Peter J. Fluor President of Texas Crude, Inc., oil and gas production (1984) William R. Grant Chairman of the Board of MacKayShields Financial Corporation (1982) Robert L Guyett Senior Vice President and Chief Financial Officer (1987) Bobby R. Inman Chairman and CEO of Westmark Systems, Inc., Admiral U.S. Navy (Retired) (1985) Ahmed A. Juffali General Partner and Chief Executive of E.A. Juffali and Bros. (1985) Sibrand Jurriaans Retired,former partner of Pierson, Heldring & Pierson, investment and commercial bankers (1964) Robert V. Lindsay Retired, former President of J. R Morgan &Co., Incorporated and Morgan Guaranty Trust Company of New York (1982) Leslie G. McCraw President and CEO, Fluor Daniei (1984) BuckMickel Vice Chairman of the Board (1977) Allen E. Puckett Chairman and CEO of Hughes Aircraft Company (1987) Louis H. Wilson General, U.S. Marine Corps (Retired) and former Commandant of the Marine Corps (1979) John A. Wright President and Chief Operating Officer (1981) Executive Committee David S. Tappan, Jr., Chairman Hugh K. Coble Robert L. Guyett Leslie G. McCraw Buck Mickel John A. Wright Audit Committee William R. Grant, Chairman Caroline L Ahmanson Peter J. Fluor Bobby R. Inman Louis H. Wilson Compensation Committee Louis H. Wilson, Chairman William R. Grant Sibrand Jurriaans Robert V. Lindsay Nominating Committee David S. Tappan, Jr., Chairman Peter J. Fluor William R. Grant Ahmed A. Juffali Sibrand Jurriaans Robert V. Lindsay Louis H. Wilson Years in parentheses indicate the year each director was elected to the Board or the year each officer or executive joined the company. Except as other wise indicated, all offices are of the company. 47 OFFICERS Corporate Executive Officers David S. Tappan, Jr. Chairman of the Board and Chief Executive Officer (1952) John A. Wright President and Chief Operating Officer of Fluor Corporation, and Chairman and CEO of St. Joe Minerals Corporation (1981) Buck Mickel Vice Chairman of the Board (1977) Robert L Guyett Senior Vice President and Chief Financial Officer (1987) Nad A. Peterson Senior Vice President and Secretary (1967) R Joseph Trimble SeniorVice President-Law (1972) Executive Operating Officers Leslie G. McCraw President and CEO, Fluor Daniel (1977) Hugh K. Coble Group President, International Operations (1966) Gerald H. Glenn Group President, Marketing and Sales (1977) Vincent L Kontny Group President, U.S. Operations (1965) Jan P. Powell President and CEO, Fluor Constructors International, Inc. (1967) Other Officers Charles J. Bradley Vice President-Human Resources and Administration (1958) James R. Byron Vice President-Government Relations (1963) David R. Copley Vice President and Treasurer (1975) Lawrence N. Fisher Vice President-Corporate Law(1974) J. Robert Fluor II . Vice President-Corporate Relations (1967) William M. Hofacre Vice President and Controller (1984) Wilbur J. Holteman Vice President-Tax (1975) Richard D. Paul Vice President-Financial and Operational Evaluation (1968) James 0. Rollans Vice President-Corporate Communications (1982) William D. Trammell Vice President-Project Finance (1968) DR 2801152 ? PRINCIPAL SUBSIDIARIES AND DIVISIONS STOCKHOLDERS' REFERENCE Engineering and Construction Fluor Daniel Daniel International Corporation Greenville, South Carolina Daniel Maintenance and Industrial Services Company Fluor Engineers, Inc. Irvine, California Fluor Technology, Inc., Irvine, California Fluor Daniel International Daniel International (Saudi Arabia) Ltd., Jeddah, Saudi Arabia Fluor Arabia Limited, Al-Khobar, Saudi Arabia Fluor Australia Pty. Limited, Melbourne, Victoria, Australia Fluor Canada Ltd., Calgary, Alberta, Canada Fluor Daniel B.V., Haarlem, The Netherlands Fluor Daniel GmbH, Dusseldorf, West Germany Fluor (Great Britain) Limited, London, England Fluor Constructors International, Inc., Irvine, California Fluor Canada Constructors, Inc., Calgary, Alberta, Canada Fluor Constructors, Inc., Irvine, California Natural Resources Management St. Joe Minerals Corporation, Clayton, Missouri A.I Massey Coal Company, Inc., Richmond, Virginia St. Joe Domestic Metals Corporation, Clayton, Missouri The Doe Run Company, Clayton, Missouri St. Joe Gold Corporation, Clayton, Missouri St. Joe International Corporation, Clayton, Missouri Other Operations American Equipment Company, Inc., Greenville, South Carolina Fluor Venture Group, Inc., Irvine, California Form 10-K A copy of the Form 10-K, which is filed with the Securities and Exchange Com mission, is available upon request Write to: Vice President and Controller, Fluor Corporation, 3333 Michelson Drive, Irvine, California 92730, (714) 975-2000. Registrar and Transfer Agent Security Pacific National Bank, Corporate Services Division, 333 South Beaudry Avenue, Los Angeles, California 90017, and Security Pacific Clearing & Services Corp. New York, 2 Recoter Street, 2nd Floor, New York, New York 10006. For change of address, lost dividends, or lost stock certificates, write or telephone: Security Pacific National Bank, Stock Transfer Division, Box 3546, Terminal Annex, Los Angeles, California 90051, Attn: Shareholder Relations (800) 423-5041 Auditors Arthur Young & Company, 3200 Park Center Drive, Costa Mesa, California 92626 Automatic Dividend Reinvestment Plan The Automatic Dividend Reinvestment Plan offered through Security Pacific Na tional Bank affords any stockholder of record of Fluor's common stock with the opportunity to buy additional Fluor shares automatically with cash dividends. In ad dition, the Plan permits stockholders to purchase additional Fluor shares each quarter through voluntary cash pay ments. A brochure describing the Plan is available upon request. Write to: Security Pacific National Bank, Dividend Reinvestment Unit, Box3546, Terminal Annex, Los Angeles, California 90051. Company Contacts Stockholders may call collect. Stockholder information: Lawrence N. Fisher (714)975-6961 investor Relations: Frederick J. Fajardo (714)975-7250 Annual Stockholders' Meeting Annual report and proxy statement are mailed about February 1. Fluor's annual meeting of stockholders will be held at9:00a.m. on March 10,1987 at the Irvine Hilton Hotel, 17900 Jamboree Boulevard, Irvine, California 92714. Common Stock and Dividend information At December 31,1986 there were 79,259,212 shares outstanding and ap proximately 28,200 stockholders of record of Fluor's common stock. Dividends are traditionally paid the first Monday follow ing the 15th day of January, Aprii, July and October. Stock Trading Fluor's stock is traded on the New York, Midwest, Pacific, Amsterdam, London and Swiss Stock Exchanges. Common stock domestic trading symbol: FLR. Common Stock History Since Going Public in 1950 08/23/57 20% Stock Dividend 12/15/61 5% Stock Dividend 03/11/63 5% Stock Dividend 03/09/64 , 5% Stock Dividend 03/08/65 5% Stock Dividend 02/14/66 5% Stock Dividend 03/24/66 2 fori Stock Split 03/27/67 5% Stock Dividend 02/09/68 5% Stock Dividend 03/22/68 2 fori Stock Split 05/16/69 5% Stock Dividend 03/06/70 5% Stock Dividend 03/05/71 5% Stock Dividend 03/10/72 5% Stock Dividend 03/12/73 5% Stock Dividend 03/11/74 3 for 2 Stock Split 08/13/79 3 for 2 Stock Split 07/18/80 2 fori Stock Split 48 DR 2801153