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mm pm ^ '^' ' ^ - ' '^' ''; '-i .** * :# HIbBBHM ^ %. --M-- BBiiMi V* .-* mbbSmSE^; SmHMras3l^HVHfes3fi DB 2801223 Hydrocarbon Aardolie Hidrocarburos ^1 _ I Hydrokarboner Erdol W&ifcatfa Hidrokarbon ymeBOflopoflbi ! Idrocarburi Hidrokarbaan To streamline the schedule and minimize rework in the field, Fluor Daniel's Hydro carbon Sector de signed this 385 MW combined-cycle cogen eration plant on its 3-D computer-aided design system The plant, at ARCO's Los Angeles Refinery in Carson, California, is the largest cogenera DR 2801222 tion facility in the Western U.S. Fluor Daniel's newlyacquired Wright Engineers and Fluor Daniel Canada are teamed to perform engineering, procure ment and construction management on INCO's mill rationaliza tion program (top) in Sudbury, Ontario. The project consolidates three milling and con centrating operations to reduce SO2 emis sions and increase operating efficiency. A The Hydrocarbon Sector is performing engineering, pro curement and construc tion management at Shell's Staniow, U.K. Refinery. The Gas Tails project (bottom) is nearing com pletion, while work on an Alkylation unit is approaching 50 per cent completion. Hydrocarbon Sector New awards in the Hydro carbon Sector more than dou bled in 1988, to $1.9 billion, compared with $721 million in the prior year. Backlog at year end was $1.9 billion, 29 percent of the company's total. Key to its success is the full range of services provided to the offshore and produc tion, pipeline, refining, petro chemical and mining and metals markets, several of which were active in 1988. The Hydrocarbon Sector serves geographically diverse markets, and is now focusing on a growing list of opportuni ties. particularly in the Asia/ Pacific region. Growth in new awards was due primarily to plant upgrades and capacity expan sions. Several petrochemical and polymer projects were booked, driven by strong product demand and low feedstock and energy prices. Energy-related projects were also awarded despite lower oil prices. Lower priced gaso line has increased demand, with an emphasis on perform ance, activating refinery oc tane enhancement projects. Additionally, over the last sev eral years oil companies have emphasized operating effi ciencies. Other factors stimu lating this market are environ mental issues and safety concerns related to aging U.S. process plants, many of which are over 25 years old. Although the market for new oil and gas production is currently limited, a few longrange projects continue to move forward. Some heavy oil projects in California and Canada are expected to pro ceed. Fluor Daniel is perform ing assignments in Alaska, and is well positioned for both onshore and offshore work when market conditions im prove. The company contin ues to maintain an industry leading position in this market because of its size and long term significance. There has been a strong resurgence of mining projects worldwide. Services are be ing provided for gold projects in the U.S., Canada, South America and Australia. In 1988, Fluor Daniel was awarded a major portion of the $1 billion world-class Escondida Copper project in Northern Chile. To strengthen the geo graphical presence and tech nical skills of the Mining and Metals Division, the company acquired Wright Engineers Ltd. in 1988. Based in Vancouver, Canada, Wright Engineers is a recognized leader in the design, engi neering and construction management of mining and metals projects. Today, Fluor Daniel's capabilities in this market are second to none. Significant projects com pleted during 1988 included the heavy oil upgrader expan sion and modernization proj ect for New Grade Energy in Saskatchewan, Canada; a 15,000 ton per day gold ore processing facility in Ridgeway, South Carolina; a gold ore processing facility for Billiton in Chile; metallurgical plants DR 2801220 4 Fluor Daniel's Power Sector is engi neering and construct ing a natural gas-fired combined-cycle cogen eration facility, includ ing the conversion of portions of an incom plete nuclear power plant in Midland, Michigan. The project for Midland Cogenera tion Venture, expected to begin operations in 1990, will be the larg est cogeneration plant in America. Growth in power demand is continuing to outpace expectations. Yet, despite unusually high peak power demand and temporary power restrictions in many areas this past summer, utili ties are reluctant to add new base-load generating capacity. New Power Sector awards include maintenance, modi fication and engineering for upgrade and plant life extension. Utility clients want to oper ate their plants longer and more efficiently which offers expanding opportunities for the Power Sector. Creative new programs and contract ing methods, including per formance incentives and alliance agreements, are being offered to attract new clients. Five years ago we were providing services to 20 utilities; today we are work ing for more than 50. A relatively new market for the Power Sector's services is privatized or independent power projects. These plants, privately owned and operat ed, sell the power they gen erate to utilities. Such projects provide an alternative to new plant construction by utilities. While still an emerging market, we expect continued growth. The market for new co generation facilities to serve industrial clients is active. During the year, engineering continued and construction began on the huge Midland Cogeneration project in Michi gan and is currently ahead of schedule and under budget. Industrial clients are inter ested in reducing the variabil ity of their plant operating costs. By building cogenera tion facilities, they supply their own steam and electric ity needs, while selling excess power to utilities. For example, Power Sector projects include an 80 MW, simple-cycle, gas-fired cogen eration facility for Harbor Co generation to provide steam for enhanced oil recovery in Wilmington, California; and a joint venture with Southern Electric International for a 50 MW, gas and oil-fired, com bined cycle cogeneration plant for Dexter Corporation in Connecticut to provide steam to their manufacturing operations. International opportunities for the Power Sector are be ing closely monitored. Privati zation of the power industry in the United Kingdom; changing energy priorities in Sweden, Norway and Can ada; and expanding power re quirements in the Asia/Pacific region offer promising markets. Significant projects com pleted in 1988 include con struction of the 160 MW demonstration plant for the Tennessee Valley Authority, using the new fluidized bed boiler technology; and engi neering, procurement and construction of a 300 MW co generation plant at Bakers field, California, for Sycamore Cogeneration, a twin of the nearby Kern River facility suc cessfully completed by Fluor Daniel in 1985. DR 2801219  Power Energie Energfa yiyi _ y Energi Energie ea/3 Tenaga 3HeprMH Energia Tenaga Ongoing mainte nance services are being provided by Fluor Daniel's Power Sector to TU Electric's four lignite-fired gener ating stations, includ ing the Monticello Station pictured. Supplemental mainte nance services are provided at an additional DR 280121 0 19 gas-fired generating stations on an asneeded basts. During the year, European and Japanese clients commit ted substantial investments to facilities in the U.S.: expan sion of a titanium dioxide facility in Georgia, for Finlandbased Kemira; a new photo conductor manufacturing plant in Virginia, for a subsid iary of Mitsubishi Kasei Cor poration, Japan's largest chemical manufacturer; and photo receptor and toner plants for Xerox in China. U.S. industry continues to focus on lower operating costs and greater efficiency. Many large U.S. companies have downsized their own E&C organizations while developing long-term client/ contractor relationships. Fluor Daniel's "partnership" with Du Pont, known as the "Delta Division," is considered the standard of the industry for such agreements. During 1988, the Delta Division worked on more than 40 different Du Pont projects worldwide including fibers, films and a wide range of chemicals. New operations were also established in Kingston, Ontario, and at Haarlem, in the Netherlands, to provide services for Du Pont in Canada and Europe. Growth in the engineered plastics and advanced com posites industries was rapid in 1988. These markets are expected to continue their expansion well into the 1990s as more applications for new and advanced products are developed. Fluor Daniel is currently working on the huge expansion of GE Plastics' "Lexan" facility in Burkville, Alabama, and is assisting on a similar plant to be built in Spain. Significant projects com pleted during the year include one of the world's largest and most modern industrial waste treatment plants in Kingsport, Tennessee, for Tennessee Eastman; a biotech facility for Immunex in Seattle, Wash ington; and retrofit of a com posites plant in Anaheim, California, for Ciba-Geigy. Power Sector The Power Sector provides a full range of engineering and construction services from project inception through maintenance primarily to elec tric and gas utility companies. Services are also provided to clients involved with cogener ation, hydroelectric, privatized power plants and waste-toenergy. Fluor Daniel is a leader in maintenance technology and offers turnkey packages which can include project financing. Our position as a leading supplier of quality services to the power industry was re confirmed in 1988 through aggressive marketing and creative packaging, despite sluggish demand industry wide. New awards in 1988 for the Power Sector declined to $414 million from $917 mil lion in 1987, which included the $470 million award for the Midland Cogeneration proj ect. Backlog at year end was $756 million, or 11 percent of the company's total. DR 2801216 Be P >z Pn Verar Pen; 06p Elabo Pern M In respc strong market d for Du Pont's master* carpetii schedule to in production stain-resistai was accelerate ginally planned two year? Daniel's Delta D in cooperatic Du Pont, com design and const within seven n to modify this e nylon fa< Seaford, Del  Industrial Industrie Industria \ MU Industri Industrie Industri ripOMbltimeHHOCTb AJ-oj Industria Perusahaan Fluor Daniel's Indus trial Sector is providing Phase III engineering, procurement and construction services to Fort Howard at its Savannah River Mill in Georgia. The plant produces paper towels and tissue prod ducts from recycled waste paper. ,  The foods and consumer products industry remains active, with a number of signif icant modernization projects. In the automotive market we are now focusing on provid ing maintenance and techni cal services to existing facilities. The pulp and paper industry grew rapidly in 1988 with several large expansion projects received, as well as awards for new grassroots facilities. Activity in pulp and paper is expected to remain strong into 1989, with oppor tunities developing in Europe, Canada, South America and Australia. The trend toward client/ contractor "alliances" contin ues. Clients recognize the advantages of shifting fixed costs to variable by contract ing for E&C services pre viously performed in-house. New alliance agreements are being developed while existing relationships are expanding to encompass broader geographic scope. We are currently performing work in Europe, Canada, Asia/ Pacific and Saudi Arabia for several U.S.-based clients under alliance agreements. in the commercial market, Fluor Daniel continues to refine its selective marketing strategy where our geographic presence or client relation ship provides a competitive advantage. The experience gained over the last three years in the design and construction of jus tice facilities has firmly estab lished Fluor Daniel in this growing market. A Engineering and construction manage ment was performed by the Industrial Sector on this 141,000 square foot dehydrated soups and sauces manu facturing facility in Asheboro, North Caro lina, for Knorr Best Foods Division. Renewed strength in the commodity markets has fueled demand for metals-related projects such as primary and recycled aluminum prod ucts. There are select oppor tunities in the steel industry as well. Activity in the electronics industry has begun to pick up. U.S. producers are now focusing on product niches through emphasis on produc tivity and efficiency. The trend to establish worldwide net works of manufacturing and supply sources is evident. Significant projects com pleted during the year includ ed Phase II of the continuing expansion and modernization program for Fort Howard's paper mill in Savannah, Geor gia; construction manage ment for a major bakery facility for the Kitchens of Sara Lee in Tarboro, North Carolina; a major expansion of Kellogg's food processing capabilities at Battle Creek, Michigan; several projects for Procter & Gamble, including two diaper plant upgrades, and a soap plant addition; and expansion of a cereal plant in China for Heinz. Process Sector T The Process Sector was one of Fluor Daniel's two fastest growing business sectors in 1988. Fueled by strong growth worldwide, new awards were $1.1 billion, up sharply from $686 million in 1987. The Process Sector pro vides services to clients in the fields of biotechnology, pharmaceuticals, medical equipment, fine and specialty chemicals, fibers, film, tex tiles, plastics, bulk chemicals and composites. Strong gains were made in expanding the geographic scope of work for existing cli ents. Awards were received from international clients for projects in the U.S., as well as for U.S. customers expanding overseas. Backlog for the Process Sector now stands at $1.2 billion, or 19 percent of the company's total. Process Sector clients tend to be technology driven. Evolving research efforts into the prevention and cure of cancer, heart disease and AIDS have stimulated the biotech, pharmaceutical and medical equipment indus tries. These markets have generated a steadily growing source of projects including a biochemical manufacturing plant in Iowa, for the Bio Products Division of Eastman Kodak; a medical devices manufacturing facility in Northern California for Beckton Dickinson; a pharmaceuti cals finishing and filling facility for Bristol Myers in Puerto Rico; and an expansion of a human vaccines plant in Bel gium for Smith Kline-RIT. Stimulated by strong de mand and high utilization rates of existing manufactur ing capacity, the chemicals industry experienced tremen dous growth during 1988. Fur ther influencing this market is the trend towards globalization. DR 2801212 A Fluor Daniel's Process Sector assisted in the design and construction of this state-of-the-art biotechnology facility for Biochemie, and is currently at work on an expansion project. The plant, located in Kundl, Austria, uses U.S. technology to produce a product which increases milk production with reduced feed require ments in dairy cows. Engineering and Construction Engineering, construction and related services (E&C), the company's principal business activity led by Fluor Daniel, delivered significantly im proved results in 1988. Oper ating profit increased to $51 million, compared with a loss of $49 million in 1987. Rev enues were up 30 percent to $4.2 billion. Serving clients from over 50 offices worldwide, Fluor Daniel provides a broader range of E&C services to more industries in more geo graphic areas than any com petitor. In 1988, building on a strong tradition of superior performance, Fluor Daniel adopted a formal statement of its mission, shown in its entirety on page 5. Increased market penetra tion, a growing base of new clients and improving busi ness conditions pushed new awards in 1988 to $6 billion, up 47 percent over the pre vious year, and the highest level since 1981. Backlog rose dramatically during the year to $6.7 billion. The backlog is well diversified among the five business sectors--Industrial, Process, Power, Flydrocarbon and Government--with a grow ing percentage of projects outside the United States. Although still recovering from the long downturn which began in 1981, overall market conditions within the E&C industry showed marked improvement during the year. Capital spending increased in most of the markets Fluor Daniel serves and further growth is expected in 1989, led by a strong U.S. market. The increased diversity in the company's global E&C business base, expanded backlog, and positive eco nomic outlook accentuate expectations for 1989 and beyond. industrial Sector Among Fluor Daniel's five business sectors, the Indus trial Sector serves the broad est range of markets, includ ing automotive and general manufacturing; electronics; heavy industries such as met als and machine tools; pulp and paper; foods and con sumer products; and commer cial and justice facility clients. New awards in the Indus trial Sector were broadly based and rose to $2.4 billion in 1988, nearly double the level achieved last year. Backlog for the Industrial Sector increased to $2.3 billion, representing 35 percent of the company's total. In general, industrial clients today are financially healthy with strong cash positions, having benefited from the economic expansion of the last several years. Capacity utilization in many of the mar kets Fluor Daniel serves is at an all-time high. The lower dollar has boosted exports by improving U.S. manufactur ers' competitiveness over seas and consumer spending at home remains strong. These diverse industrial markets are driven by their own individual set of eco nomic and market factors. DR 2801211 Fluor Daniel , - As Fluor Daniel employees, ' our mission is to assist clients in attaining a competitive ad vantage by delivering quality services of unmatched value. . . We provide a complete range of engineering, construction, maintenance and related services to virtually all ndustries and government. We service our clients through a network of offices strategically located around the world. We globally link technology, experience, hu man resources and services in meeting client needs. To add value to our services, these principles are emphasized: / AT. ,A. :; \ yV. : :: ; . ' :y';T Ty' y-; , . .it.;, . t :>;: v We are client focused. , yy . r/')- /{': We are innovative and flexible in meeting client needs, w . '.iy- ' We deliver quality T And above all, we do every task safely. : Our philosophy s bascc upon ethical conduct, mutual trust and teamwork. To ens-^-e continuous improveme'" wc challenge, test, reevaluve and continually ra so oc- 'tanda rds of excellence. As a service organization, our success depends upon the combined capability and contribution of ail employees, Fluor Dame! is dedicated to fostering a work environment which challenges, enriches and rewards each individual. DR 2801210 84 85 86 87 88 Net Earnings (Loss) Per Share dollars 84 85 86 87 88 by Segment Lead 3% Coal 15% E&C 82% 45 As the United States and Canada combine forces in what will become the larg est economic unit in the world, there is finally an opportunity for Fluor Daniel clients to compete on that "level playing field" we've always advocated. International tensions are gradually dissipating in the Middle East and Asia and many of these countries will be standing in line demanding that their economies be mod ernized. Fluor Daniel's supe rior reputation is well known throughout these areas and we fully expect to be called upon for our proven skills. In 1992, the European Common Market will be come a community of trading nations operating as a single economic bloc. Anticipation of that change is already stim ulating new work for our Eu ropean offices, which have 30 years of continuous presence in that geographic area. Going forward into the dec- * ade of the 1990s, we will continue to focus on our core business, engineering and con struction. We will maintain the high quality of performance which is our hallmark, while growing as rapidly as is pru dent to keep pace with the swiftness of change in our global markets. We will be selective in pur suing projects with the best profit potential; that is, proj ects which offer either favor able long-term positioning or immediate strengthening of our backlog and earnings. Our investments in coal and lead will be managed opportunisti cally, taking full advantage of improving commodity markets. Our overriding objectives are to achieve enhanced value for our shareholders by delivering superior earnings growth and return on equity, and to be the top performer in our industry worldwide. An increasing number of governments are embrac ing free enterprise solutions to improve their ailing econo mies. This means more opportunities for private investment and increased demand for Fluor Daniel's services. We have already established a record of quality performance on projects for the People's Republic of China, the Soviet Union and other controlled economies. Our experience and our reputa tion for integrity stand us in good stead as corporate citi zens of the world. David S. Tappan, Jr. Chairman and Chief Executive Officer Leslie G. McCraw President January 19,1989 DR 2801209  Vtye identified niche acquisitions as a strategy for strengthening and expanding our engineering and construc tion base. During 1988 two such acquisitions were made, for a total investment of ap proximately $50 million. In March, Fluor Daniel purchased an interest in SOS Interna tional, a leading contractor in the multi-billion dollar asbes tos abatement industry. In August, Wright Engineers Ltd. of Vancouver, Canada became part of Fluor Daniel, expand ing the company's worldwide capabilities in the mining and metals industry. Additional E&C niche acquisitions will be considered. We presented plans for improved performance from our restructured investments in coal and lead. A.T. Massey Coal Company reported rec ord operating profits in its first full year following the restructuring. Doe Run lead operations, in which Fluor holds 57.5 percent owner ship, also had an excellent year. Their strategies for the future will be to emphasize cash flow by remaining lowcost producers, efficient oper ators, and market leaders. > We promised to re store the dividend as soon as operating profits justified ac tion. The dividend has indeed been resumed, albeit on a modest scale, and will be monitored and adjusted as performance warrants. to offset the cash flow re quirements of our Sugar Land, Texas facility lease, thus improving the return on that cash by 300 basis points. Optimizing the return on our growing capital resource posi tion is a continuing financial management challenge. > We talked about main taining our strong and healthy financial condition and further reducing long-term debt. Un questionably, Fluor Corpora tion is in excellent financial shape today. Long-term debt was reduced to less than $100 million, 13.6 percent of total capital, and cash re serves and the bond portfolio exceed $300 million. The progress achieved in 1988 would not have been possible without the united efforts of our employees. management team and board of directors. We are indebted also to our shareholders and clients for their confidence, trust and support. These con stituencies are the source of Fluor's strength. Director and Management Changes Jn the new year, we depend for leadership on a cadre of seasoned executives who have ably demonstrated their skills. > We said effective management of our large working capital position was a priority. This past year a $155 million bond portfolio was established In January 1989, Gerald M. Glenn, Group President, Marketing and Sales for Fluor Daniel was elected to the Fluor Board of Directors and Executive Committee. The board's membership now stands at 16 with nine out side directors. Outlook T Today Fluor Daniel is the most diversified, and broadly-based engineering and construction firm operating anywhere in the world. Our restructuring is behind us, we are financially strong, positive momentum is accel erating and the company is uniquely equipped to take advantage of the expanding capital investment trend currently underway. The world is in an acceler ating state of change and Fluor Daniel will certainly prosper as more and more global markets expand be yond previous expectations. In the U.S. alone, in dustry after industry is oper ating at maximum productive capacity and is extending its reach both at home and abroad. Fluor Daniel is cur rently ranked Number 1 among the top 400 U.S. con tractors by Engineering News-Record Magazine and was honored as the nation's safest contractor by The Busi ness Roundtable. We are po sitioned to expand our market share through a continuing stream of contract awards from U.S. clients. Letter Brief Carta ilU, _v Jiff > Brev > Brief mm > Surat > flWCbMO RU > Lettera Surat DR 2801208 Letter to Shareholders Dear Fellow Shareholder: A year ago we announced com pletion of the company's re structuring program, significant strengthening of our financial position and a new direction for Fluor Daniel, our core engineering and construction (E&C) business. We said that Fluor was on the threshold of auspicious new beginnings. Those new beginnings are now fulfilling their promise. In the past 12 months, impor tant milestones along Fluor's road to attaining its full earn ings potential have been achieved. Fluor Daniel, and our investments in coal and lead, all reported meaningful gains in operating profits. Net earnings for 1988 were $56.4 million, or 71 cents a share, an increase of 112 per cent over the previous year. Revenues from continuing operations were $5.1 billion, up 31 percent from the $3.9 billion reported for 1987. While still a long way from our profit objectives, our progress this past year is reassuring. Improved profitability is just one of the objectives estab lished a year ago to enhance shareholder value: We set as a target greater expansion of Fluor Daniel's services to diversi fied markets worldwide. New awards for 1988 totaled $6 billion, a 47 percent advance over the prior year. The inter national component of new awards increased from 7 to 24 percent--clear indication that Fluor Daniel's globalization efforts have taken hold in moving toward our goal of 40 to 60 percent. We discussed expan sion of backlog across a wide spectrum of industries as an important Fluor Daniel objec tive. At year end, backlog was up 43 percent to $6.7 billion, the highest level in six years and well balanced among our five business sectors. The size and diversity of our back log bodes well for the future. We said we would enhance the value of our serv ices to clients by capitalizing on our industry-leading safety record and three-dimensional engineering design capability throughout our worldwide network of more than 50 offices. The performance of Fluor Daniel's operations cen ters in executing projects and the reaction of our clients featured in this annual report speak for themselves. We responded to our clients' continuing need for a choice of labor posture by strengthening the manage ment of Fluor Constructors International, Inc. (FCII), our union construction arm. Based on FCII's positive con tribution to earnings in 1988, their future looks bright. DR 280120: Highlights $ in thousands, except per share amounts Fiscal Year Revenues from continuing operations Earnings (loss) from continuing operations Net earnings (loss) Earnings (loss) per share Continuing operations Net earnings (loss) Return on average shareholders' equity Capital expenditures New awards Cash dividends per common share At Year End Working capital Bond portfolio Total assets Backlog Capitalization Long-term debt Shareholders' equity Total capitalization Percent of total capitalization Long-term debt Shareholders' equity Closing stock price Shareholders' equity per common share Number of employees 1388 1987 1986 . $5,132,457 56,395 56,395 $3,924,480 (75,275) 26,592 $4,341,700 (18,617) (60,443) .71 $ .71 10.0% $ 86,259 5,955,200 $ .02 (.95) $ .33 3.3% $ 99,824 4,059,700 $ .10 (.23) $ (.76) (6.0)% $ 91,619 2,992,200 $ .40 $ 154,546 154,777 2,073,346 6,658,600 94,961 601,747 $ 696,708 13.6 86.4 $ 19% $ 7.61 17,876 $ 480,184 4,000 2,061,186 4,667,300 217,762 531,743 $ 749,505 29.1 70.9 $ 14% $ 6.74 14,351 $ 265,341 -- 2,565,393 4,291,400 511,510 950,240 $1,461,750 35.0 65.0 $ 12Va $ 11.99 22,309 Dividends were resumed in the fourth quarter of 1988 at $.02 per share following a suspension which began in the second quarter of 1987. In 1987 shareholders' equity was reduced by $438 million due to the revaluation of assets and liabilities in connection with a quasi-reorganization. See Notes to Consolidated Financial Statements. Company Description Fluor Corporation is one of the world's largest inter national engineering, construc tion, and related services companies, and has invest ments in coal and lead. Fluor Daniel, the company's principal operating business unit, is organized to provide a broad range of services to clients in five business sec tors: industrial, Process, Power, Hydrocarbon and Gov ernment. Services include feasibility studies, conceptual design, project management, engineering, construction (with a full range of labor pos ture alternatives), procure ment, technical services, proj ect financing, maintenance and plant operations. Fluor Daniel provides global capabil ity from over 50 offices lo cated around the world. A. T. Massey Coal Company, Fiuor's investment in coal, produces both high-quality, low-sulfur steam coal and metallurgical coal and ranks among the 10 largest coal companies in the United States. In addition to sales of produced coal, Massey also markets coal for independent producers. Fiuor's investment in lead is conducted through its 57.5 percent interest in The Doe Run Company, which pro duces approximately 60 percent of U.S. primary lead metal production. DR 2801206 About the Cover In keeping with Fluor Daniel's newly adopted mission state ment (page 5), the cover symbolizes the global market to which we provide our engineering, construction and related services. Linked by technology, experience and human resources, we serve our clients through a net work of offices strategically located around the world. Contents 1 Highlights 2 Letter to Shareholders 5 Mission 6 Operations Report 6 Engineering and Construction 6 Industrial Sector 7 Process Sector 11 Power Sector 15 Hydrocarbon Sector 19 Government Sector 19 Fluor Constructors International 20 Natural Resource Investments 20 Coal 21 Lead 22 Operating Statistics 24 Financials 24 Management's Discussion and Analysis 28 Reports of Management and Independent Public Accountants 29 Consolidated Financial Statements 46 Reference Information 46 Directors 47 Officers 47 Principal Subsidiaries and Divisions 48 Stockholders' Reference V DR 2801205 ^O'-R DR 2801204 and an electrolytic refinery for the major Olympic Dam min ing project at Roxby Downs, South Australia; and the re build of the fire-damaged ace tic acid plant at Pampa, Texas, for Hoechst Celanese. Government Sector T The Government Sector provides a full range of engi neering, procurement, con struction, operations and maintenance services to gov ernment clients at all levels. Clients also include non government organizations in communications systems, nuclear fuel cycle work and environmental services includ ing hazardous waste. In addi tion, this sector also serves the aerospace, defense and transportation industries, as well as acting as an advanced technology base for all Fluor Daniel business sectors. Fiscal 1988 presented tough marketing challenges. Concern over the U.S. federal budget deficit limited spend ing levels on existing con tracts, as well as future project plans. As a result, new awards of $154 million were below the record high of $314 million a year ago. Despite this difficult environ ment, the sector expanded its services and made inroads into new market areas. Back log at year end was up 35 percent to $409 million, or six percent of the company's total. Key awards in 1988 included a contract to provide engi neering and construction management services for the installation of data networks to connect 850 Bank of Amer ica branches throughout California. The information systems area is targeted as a significant growth market. The Government Sector also expanded its environ mental services to the potentially huge market for hazardous waste remediation, disposal and cleanup. The sector was selected by the Environmental Protection Agency as a prime contractor and program manager for the Alternate Remedial Contract Strategy (ARCS) program, covering 15 states. With Superfund-supported projects now getting underway, a sig nificant market for environ mental services is rapidly developing. Through its FD Services unit, the sector is increasing operations and maintenance (O&M) services to govern ment projects such as the housing maintenance and util ity operations at the Naval Weapons Station at Charles ton, South Carolina. During the year, the Gov ernment Sector essentially completed a nationwide fiber optic network for U.S. Sprint, and began the preliminary engineering phase for the strategically important Hanford Waste Vitrification Plant in Washington. Government Staatscontracten Gobierno > ^sd-i _o BJtf Statsentrep riser Staatsauftrage i&Jtt Penerintah roc3aa3bi ST1 Governo Pemerintah Fluor Constructors International T Fluor Constructors Interna tional, Inc. (FCII) is the com pany's union construction arm. Their strategic mission is to support company projects in the U.S. by providing union construction services where requested by clients. *4 The Government Sec tor is providing engi neering, architectural design, construction management and in spection services for approximately 115 new, expanded or modified weather serv ice office facilities. Pro gram management and construction over view is also being per formed for 175 Next Generation Weather Radar (NEXRAD! facili ties to be installed at U S a b ntci national loc, n s , ' i is this ws -Iu Ash- DR 2801224 I, i'fi ; .egon. of Massey's commit ment, oyr relation ship has matured, and we are pleased to have them as our metallurgical : coal supplier. The Rawl Facility in West Virginia is Mas sey's largest mining complex producing over 5 million tons of coal in 1988. Rawl has reserves and process ing capabilities which enable it to blend different qualities of coal to produce both metal lurgical coal and vary ing grades of steam coal. During the year, two new coal storage areas, to enhance blending capabilities, were added, and the coal washing circuit was upgraded. FCII made a positive contri bution to operating results in 1988, compared with a sig nificant loss last year. The improvement is primarily attributable to a strengthened management team which focused on successful com pletion of certain fixed-price contracts, bid in prior years under extremely competitive conditions, and the continuing priorities of improved produc tivity, quality and safety. During 1988, FCII estab lished an Eastern Operations office in Greenville, South Carolina, and aligned its organ ization to be more respon sive to the five business sec tors. While the majority of FCII's work is currently for cli ents served by the Power Sector, expanded opportuni ties for other business sec tors are anticipated in 1989. Natural Resource Investments Coal T A.T. Massey Coal Company, Fluor's investment in coal, produces high-quality steam coal for electric utilities and metallurgical coal for the steel industry and today ranks among the 10 largest U.S. coal companies, in addition to produced coal, Massey also markets coal for independent producers. Massey's results for the year were outstanding. Oper ating profits were up 78 percent to $50 million on a 35 percent revenue advance to $784 million. The profits in cluded a one-time pretax gain of $7 million from a settle ment with the United Mine Workers. Fiscal 1988 was Massey's first full year of operations since it was partitioned from Shell Oil Company. The parti tioning resulted in Fluor assuming control of its pro portionate share of the assets and retaining the manage ment team. Massey's strategy continues unchanged. Mar keting of high-quality, lowsulfur coal to the eastern utility market is the area of primary concentration. Emphasis on technical services and quality is the key to establishing and maintaining long-term client relationships in this market. A strong focus on productivity improvements allowed Massey to enhance operat ing results and to offer clients competitive prices. Steam coal, which is used by utilities for electricity gen eration, accounts for approxi mately 86 percent of total U.S. coal consumption. The outlook for this important market continues to be favor able. Growth in demand for electricity has been strong, particularly in the eastern United States where Massey is geographically well posi tioned. In addition, as the last of the nuclear plants commis sioned in the 1970s come onstream, new electric power generation will be supplied primarily by coal-fired plants. Steam coal sales in 1988 were up 18 percent as ex treme temperatures drove DR 2801225 Doe ftun, and Its predecessor, won "Supplier of the Year" honors from C&D for three consecutive years. It has been our privllege, for 35 years. to deal with a firm that is responsive and consistently provides an excellent product with quality service--all critical elements in the supply of the main raw material for production of our industrial batteries. H. Drummond Murdoch President and CEO C&D Charter Power Systems Fluor s portion of Doe Run lead metal sales in 1988 was 147,000 tons, up 12 percent from a year ago. During 1988, by-product recovery which reduces the overall cost of produc tion was significantly improved. The mill shown above pro duces metals concen trates for feedstock to the smelter. peak energy requirements to unexpected levels this past summer. The increased volume more than offset the effect of lower prices from continued over capacity in the coal industry. Massey is also the leading commercial supplier of metallurgical coal in the United States. A revitalized U.S. steel industry, as well as renewed strength worldwide, has increased opportunities for metallurgical coal sales at home and abroad. The lower level of the U.S. dollar has also contributed to increased export sales by making U.S. produced coal more competi tive in the world market. Lead The company's investment in lead operations, conducted through its 57.5 percent inter est in The Doe Run Company, experienced dramatic improve ment in operating results in 1988. Operating profit of $29 million was recorded for the year, compared with a modest loss in 1987. Completing its second full year of operations as a restructured company, Doe Run benefited from strong pricing. The commodities market enjoyed renewed strength during 1988 allowing the operation to achieve marked improvement in by-product credits. Moderate tightness in the availability of lead metal worldwide kept upward pressure on prices, ending the year at the highest level since 1980. Demand for lead has been strong in the replacement battery market, a primary use for lead, due to the deteriorating effects of this past summer's extreme temperatures. Additionally, the lower dollar has kept U.S.-produced lead competi tive by reducing the levels of imported metal. Improved earnings in 1988 helped fund an aggressive program for facilities mainte nance and upgrading. Addi tionally, Doe Run was able to capitalize on high copper prices this year by increasing its production of copper. The Brushy Creek mill was recom missioned and converted entirely to copper production. Selected high copper-bearing ore from the company's six mines is processed through this facility. Approximately 75 percent of Doe Run lead is used in the production of batteries. As a result, consumption of lead is closely associated with the automobile industry, a reliable long-term market. Other uses of lead include load-leveling batteries and standby power systems for utilities and communications and computer networks. Lead prices are expected to remain relatively strong m 1989, although they may moderate somewhat if the level of demand experi enced in 1988 is not sustained. DR 2801226 Fluor Operating Statistics $ in thousands/Year ended October 31, Engineering and Construction Work Performed Revenues Operating Profit (Loss) New Awards Backlog Employees 1988 $4,267,892 4,225,212 50,819 5,955,200 $6,658,600 15,576 1987 $3,370,957 3,251,304 (49,473) 4,059,700 $4,667,300 11,993 1986 $3,817,200 3,727,764 (71,152) 2,992,200 $4,291,400 12,068 1985 $3,438,327 3,226,486 (106,528) 4,485,300 $5,114,700 14,530 1984 $4,458,238 3,315,398 84,220 4,151,300 $4,194,200 16,353 $ in millions Backlog by Sector and Location Industrial Process Power Hydrocarbon Government Total Backlog United States Outside U.S. Total Backlog $ 1988 % $ 1987 % $ 1986 % $ 1985 % $ 1984 % 2,338 1,224 756 1,932 409 6,659 35 19 11 29 6 100 5.298 1,361 80 20 6,659 100 1,661 836 927 940 303 36 18 20 20 6 4,667 100 4,039 628 4,667 87 13 100 1,865 610 1,032 690 94 44 14 24 16 2 4,291 100 3,587 704 4,291 84 16 100 2,453 536 762 1,289 75 5,115 48 11 15 25 1 100 4,072 1,043 5,115 80 20 100 1,690 324 412 1,700 68 4,194 40 8 10 40 2 100 2,838 1,356 4,194 68 32 100 $ in thousands/in thousands of short tons Year ended October 31, Coal* Revenues Operating Profit (Loss) Employees Steam Coal Produced Metallurgical Coal Produced Produced Coal Sold Purchased Coal Sold 1988 $783,719 $ 50,375 1,232 11,078 3,980 15,025 10,038 1987 $580,123 $ 28,326 1,372 9,258 2,825 12,531 5,306 1986 $516,943 $ 49,310 3,307 9,342 2,175 11,620 2,522 1985 $475,051 $(223,038) 3,571 7,795 1,730 9,528 2,174 1984 $489,634 $ 14,800 4,709 7,998 2,168 9,982 1,931 'Amounts through June 1987 represent 50% of Massey's operations, except the number of employees which is 100%. Commencing July 1987, amounts include 100% of the operations of Massey after reflecting the partitioning with Shell Oil. See Notes to Consolidated Financial Statements. $ in thousands/in short tons Year ended October 31, Lead* Revenues Operating Profit (Loss) Employees Lead Content of Concentrates Produced Lead Metal Sold 1988 $123,526 $ 29,022 1,068 139,809 146,879 1987 $ 93,053 $ (5,511) 986 123,888 130,753 1986 $ 96,993 $ (26,640) 855 186,975 193,849 1985 $ 74,905 $(187,105) 957 172,781 177.772 1984 $ 96,669 $(41,460) 1,526 137,618 169,080 'Amounts through 1986 represent 100% of domestic lead operations. Commencing in 1987 amounts represent Fluor's 57.5% interest in the operations of the Doe Run Company, except the number of employees which is 100%. See Notes to Consolidated Financial Statements. 22 23 DR 2801227 m 85 86 87 88 Backlog dollars in billions 84 85 86 87 88 dollars- in millions 84 85 86 87 88 V2& rnmBBm i0 6 J i>o 2& o > Usd Revenues* dollars in millions 84 85 86 87 88 > International Backlog percent of total 84 85 86 87 28 21 tA 7 0 Total Coal Sold* millions of short tons Purchased Produced 84 85 86 87 88 84 85 86 87 88 6 H|B| 6 4a :3 2 MHHIiBHBBpPr o New Awards dollars in billions Backlog by Business Sector Government 6% Power 11 % Process 19% Hydrocarbon 29% Industrial 35% > Lead Metal Sold* thousands of short tons DR 2801228 Amounts reflect Fluor's proportionate share for all periods. Management's Discussion and Analysis 24 25 Results of Operations Earnings from continuing op erations were $56 million in 1988 compared with a toss of $75 million in 1987 and a loss of $19 million in 1986. The re lated earnings per share were $.71 for 1988 compared with a loss per share of $.95 and $.23 in 1987 and 1986, re spectively. Revenues from continuing operations in creased 31% in 1988 follow ing a 10% decrease from 1986. In 1988 the company had net interest income of $10 million compared with net in terest expense of $40 million in both 1987 and 1986. In creased interest income in 1988 compared with 1987 and 1986 is due to substantial returns on cash and cash equivalents and the bond portfolio. Funds invested were provided primarily from collection of proceeds from sale of the discontinued metals business. Reduced interest expense in 1988 compared with 1987 and 1986 reflects lower average debt outstanding. Engineering and Construction New contract awards for En gineering and Construction in creased 47% in 1988 to $6.0 billion compared with $4.1 bil lion in 1987, and $3.0 billion in 1986. The engineering and construction industry is expe riencing the early stages of a growth cycle as capital expenditures are increasing in response to record capacity utilization in many of the industries served by the com pany. Improving worldwide business conations en hanced the overall 1988 in crease in new awards as well as contributed to the inter national component of both backlog ana new awards. Backlog at October 31,1988 was $6.7 billion (up 43%) compared with $4.7 billion and $4.3 biion at October 31, 1987 and i$36. respectively. Engineer rg and Construc tion had operating profits of $51 million In 1988 compared with a loss cf $49 million in 1987 and a loss of $71 million in 1986. Marketing effective ness and operational efficien cies continue to improve results as the reorganization of the segment, finalized in 1987, has enabled expansion and diversification of engi neering and construction services. Improved operating results also-reflect the impact of increasing margins on orders received over the last 12-18 months. New awards include more full service contracts, providing mainte nance, engineering and technical services as well as project and construction management. The number of employees increased 30% in 1988 compared with a slight reduction in 1987 and a 17% reduction in 1986. In August 1988, Wright En gineers Limited (Wright) was purchased for consideration 84 85 86 87 88 6 HHHH i 3 2 Mr o Revenues dollars in billions 84 85 86 87 88 3 Net Interest Income (Expense) dollars in millions 84 85 86 87 88 3OO Capital Expenditures dollars in millions DR 2801229 Which, depending on future operating results, could reach a maximum of approximately $8 million. Wright, based in Canada, is a world-recognized leader in the process and de tailed design and construction management of gold, copper, uranium, complex sulfides and coal projects. During 1988, certain ex cess real estate rental costs were charged to accrued lease costs whereas such costs were charged to oper ations in 1987 and 1986. The accrual for such costs was established in connection with the company's 1987 quasi-reorganization. Operat ing results for 1987 and 1986 reflect $23 million and $22 million, respectively, of losses incurred on certain fixed price construction contracts bid in prior years under extremely competitive conditions. These contracts were completed in 1988 without incurring addi tional overruns. Coal In the third quarter of 1987 the company completed a partitioning of the assets of Massey Coal Company (Mas sey). The partitioning resulted in no net gain or loss. Subse quent to the partitioning the company has fully consolidated the results of Massey. Revenues and operating profit from Coal operations in 1988 were $784 million and $50 million, respectively. compared with revenues of $580 million and operating profit of $28 million in 1987. Revenues and operating profit in 1986 were $517 million and $49 million, respectively. In 1988, operating results im proved significantly as lower costs and higher sales vol umes of produced coal as well as additional revenues from brokered coal sales more than offset a decline in steam coal realized prices. Coal results for 1988 included $7 million related to a favor able settlement with the United Mine Workers. Lead T Effective November 1,1986 the company transferred the assets of its lead business in exchange for a 57.5% interest in a partnership called The Doe Run Company (Doe Run). The company propor tionally consolidates its inter est in the results of Doe Run. Lead operations realized an operating profit of $29 million on revenues of $124 million in 1988, compared with an oper ating loss of $6 million on rev enues of $93 million in 1987 and an operating loss of $27 million on revenues of $97 million in 1986. Operations improved significantly in 1988 compared with 1987 and 1986 due primarily to an increase in realized prices, higher sales volumes and lower operating costs. Operating costs in 1988 were reduced by higher by-product credits (copper and zinc) as realized prices for these commodities were up significantly over 1987 and 1986. Operating re sults in 1987 were affected by operational inefficiencies and downtime at the Hercu laneum smelter. The company's consolidated results of operations in 1988 benefitted from reduced de preciation and amortization charges due to certain fair value adjustments effected through the October 31,1987 quasi-reorganization. Such ad justments had no impact on 1987 or 1986 results of operations. Discontinued Operations T In 1987 the company initiated a plan for the divestiture of the assets of its Metals seg ment except for the lead op erations which were retained. As part of the divestiture the company sold its 90% inter est in St. Joe Gold Corpora tion and certain other gold properties resulting in an after tax gain of approximately $248 million. The company also completed the sale of its zinc operation resulting in an after tax loss of $15 million. Metals operations remaining at October 31,1987 were written down to their net re alizable value resulting in an after tax charge to discontin ued operations of $122 mil lion. In 1988, the remaining base metals businesses, ex cept for Pea Ridge, were sold. Financials Balansen Balances olUU Status Bilanzen Keuangan BanaHCbi Bilanci Kewangan DR 2801230 Other . In March of 1988, the com pany made an investment, convertible into a controlling equity interest, in SOS Inter national (SOS), a leading contractor in the asbestos abatement industry. Asbestos abatement is a relatively new, fast-growing industry and as such has experienced severe competition and the normal start-up and cost risks associ ated with such an environ ment. Prior and subsequent to the company's investment, SOS experienced losses. Since the date of investment, the company has recognized losses of $9 million, including $2 million of investment am ortization. Management be lieves the combined strengths of Fluor Daniel and SOS will provide stronger market pres ence and penetration, maxi mizing the profit opportunities in this emerging market. Corporate administrative and general expense in creased 36% in 1988 com pared with 1987 primarily due to higher insurance costs and accrued obligations associated with the company's incentive compensation plans. Fourth quarter 1987 results included a provision for the difference between contract rents and estimated fair mar ket rents for office space to be subleased in the future. In addition, certain investments were written down to net realizable value. In 1988 and 1987 there is no significant difference be tween the effective federal income tax rate on results of continuing operations and the statutory rate. The difference between the effective and statutory rates in 1986 is pri marily due to the recognition of a nontaxable gain and the effect of capital gain rates. Implementation of State ment of Financial Accounting Standard 96--"Accounting for Income Taxes," which is not required until fiscal 1991, is not expected to have any material impact on the company. Financial Position and Liquidity Working capital at October 31,1988 was $155 million compared with $480 million at October 31,1987. The decrease is primarily due to early retirement of long-term debt, the purchase of a long term bond portfolio and the investment in SOS. Working capital at October 31,1987 included a $450 million receivable from the sale of gold operations which was collected in November 1987. The company's bond port folio investment totaled $155 million at October 31,1988. The cash flows from these bonds are scheduled to offset and match the cash flow obli gations on the Sugar Land facility lease. Capital expenditures for 1988 were $86 million com pared with $100 million in 1987 and $92 million in 1986. In 1987, capital expenditures included the repurchase of land in Sugar Land, Texas for $26 million. The long-term debt to cap italization ratio at October 31, 1988 was 13.6% compared with 29.1 % and 35.0% at October 31,1987 and 1986, respectively. The improved 1988 ratio reflects both a re duction in long-term debt of $123 million, and an increase in shareholders' equity due to net earnings. At October 31, 1988, all long-term debt bears interest at fixed rates. The company has on hand and access to, sufficient sources of funds to meet its anticipated operating, expan sion, and capital needs. Sig nificant short and long-term ' lines of credit are maintained with banks which provide adequate operating liquidity. The Board reinstated cash dividends in the fourth quar ter of 1988 and paid a cash dividend of $.02 per share in October, 1988. Although the company is affected by inflation, its Engi neering and Construction operations are generally pro tected by the ability to recov er cost increases through price escalation provisions in most contracts. Coal and Lead operations produce commodities which are inter nationally traded at prices es tablished by factors outside the control of the company. Management believes the company's substantial coal and lead reserves provide a significant hedge against any adverse long-term effects of inflation. 26 27 DR 2801231 27 Selected Financial Data 28 Reports of Management and Independent Public Accountants 29 Consolidated Statement of Operations 30 Consolidated Balance Sheet 32 Consolidated Statement of Cash Flows 33 Consolidated Statement of Shareholders' Equity 34 Notes to Consolidated Financial Statements 43 Segment Information 45 Quarterly Financial Data Fluor Selected Financial Data 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) Return on average shareholders' equity Cash dividends per common share 1988 1987 1986 1985 1984 $5,132.5 $3,924.5 $4,341.7 $3,776.4 $3,901.7 90.9 56.4 56.4 (126.1) (75.3) 26.6 (55.0) (18.6) (60.4) (556.2) (512.8) (633.3) (34.7) (23.2) 1.0 .71 $ .71 $ 10.0% $ .02 $ (.95) .33 3.3% .10 $ $ (.23) (.76) (6.0)% .40 $ $ (6.48) (8.01) (41.7)% .40 $ $ (.29) .01 -- .60 Financial Position Current assets Current liabilities Working capital Bond portfolio Property, plant and equipment, net Total assets Capitalization Long-term debt Shareholders' equity Total capitalization Percent of total capitalization Long-term debt Shareholders' equity Shareholders' equity per common share Common shares outstanding at October 31 $ 998.6 844.0 154.6 154.8 729.8 2,073.3 95.0 601.7 $ 696.7 13.6 86.4 $ 7.61 79.1 $1,213.5 733.3 480.2 4.0 735.2 2,061.2 217.8 531.7 $ 749.5 29.1 70.9 $ 6.74 78.9 $ 922.1 656.8 265.3 -- 1,301.8 2,565.4 511.5 950.2 $1,461.7 35.0 65.0 $ 11.99 79.3 $1,057.2 1,020.7 36.5 -- 1,433.3 2,796.4 250.8 1,033.9 $1,284.7 19.5 80.5 $ 13.06 79.1 $1,025.9 1,016.4 9.5 -- 2,338.2 3,891.6 716.2 1,696.4 $2,412.6 29.7 70.3 $ 21.49 78.9 Other Data New awards received during year Backlog at October 31 Capital expenditures Cash provided (utilized) by operating activities Number of employees at October 31 $5,955.2 6,658.6 86.3 $4,059.7 4,667.3 99.8 $2,992.2 4,291.4 91.6 $4,485.3 5,114.7 121.2 $4,151.3 4,194.2 285.5 $ 17.7 17,876 $ 57.3 14,351 $ (224.2) 22,309 $ (21.0) 26,958 $ (63.9) 32,153 See Management's Discussion and Analysis on pages 24 to 26, Consolidated Statement of Operations on page 29 and Notes to Consolidated Financial Statements and Quarterly Financial Data for information relating to significant items affecting the results of operations. Dividends were resumed in the fourth quarter of 1988 at $.02 per share following a suspension which began in the second quarter of 1987. At October 31, 1987, a quasi-reorganization was effected which resulted in a net reduction in shareholders' equity of $438 million. See Notes to Consolidated Financial Statements for additional information. DR 2801232 Fluor Reports of Management and Independent Public Accountants Management The company is responsible for preparation of the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and shareholders' equity. They have been prepared in conformity with generally accepted accounting principles, which have been ap plied on a consistent basis, and management believes that they present fairly the company's con solidated financial position and results of operations. The integrity of the information presented 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 sys tem and related systems of internal controls, designed to protect the company's assets and prop erly 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 public accountants in connection with their annual audit. The Board of Directors pursues its responsibility for financial information and review through an Audit Com mittee of Directors who are not employees. The internal auditors and the independent public accountants have full and free access to the Committee. Periodically the Committee meets with them without management present to discuss the results of their examinations, the adequacy of internal accounting controls and the quality of financial reporting. Independent Public Accountants Board of Directors and Shareholders Fluor Corporation We have examined the accompanying consolidated balance sheet of Fluor Corporation at October 31,1988 and 1987, and the related consolidated statements of operations, cash flows and share holders' equity for each of the three years in the period ended October 31,1988. 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 considered neces sary in the circumstances. In 1986 the accounts of Massey Coal Company, a 50% owned joint venture, were examined by other independent auditors; insofar as our opinion on the consolidated financial statements related to such assets and operations, which constituted 19% and 11% of consolidated assets and revenues, respectively, it is based solely on their report. In our opinion, based on our examinations and the report of other independent auditors, the accompanying consolidated financial statements present fairly the consolidated financial position of Fluor Corporation at October 31,1988 and 1987, and the consolidated results of operations and cash flows for each of the three years in the period ended October 31,1988, in conformity with generally accepted accounting principles applied on a consistent basis during the period. Orange County, California December 5,1988 28 29 DR 2801233 Fluor Consolidated Statement of Operations In thousands, except per share amounts/Year ended October 31, 1988 1987 1986 Revenues Engineering and construction services Natural resources $4,225,212 907,245 $3,251,304 673,176 $3,727,764 613,936 Total revenues 5,132,457 3,924,480 4,341,700 Cost of Revenues Engineering and construction services Natural resources 4,181,269 827,848 3,298,628 650,886 3,794,757 591,406 Total cost of revenues 5,009,117 3,949,514 4,386,163 Other Income and Expense Corporate administrative and general expense 32,795 24,131 32,532 Interest expense Interest income Equity in loss of SOS Provision for sublease losses and write-down of investments 27,259 (37,060) 9,451 -- 58,304 --(18,231) 36,845 63,185 ----(23,345) Gain on sale of Irvine facility and common stock of St. Joe Gold Corporation -- -- (61,881) Total costs and expenses 5,041,562 4,050,563 4,396,654 Earnings (Loss) From Continuing Operations Before Taxes 90,895 (126,083) (54,954) Income Tax Benefit (Expense) (34,500) 50,808 36,337 Earnings (Loss) From Continuing Operations 56,395 (75,275) (18,617) Discontinued Operations Loss from operations, net of income taxes Gain (loss) on disposal, net of income taxes -- (16,544) (17,479) -- 111,254 (24,347) Earnings (Loss) From Discontinued Operations -- 94,710 (41,826) Earnings (Loss) Before Extraordinary Item Tax benefit of net operating loss 56,395 -- 19,435 7,157 (60,443) -- Net Earnings (Loss) $ 56,395 $ 26,592 $ (60,443) Earnings (Loss) Per Share Continuing operations Discontinued operations Extraordinary item Net Earnings (Loss) Per Share $ .71 $ (.95) $ (.23) -- 1.19 (.53) -- .09 , -- $ .71 $ .33 $ (.76) Shares Used to Calculate Earnings (Loss) Per Share See Notes to Consolidated Financial Statements. 79,582 79,484 79,248 DR 2801234 Fluor Consolidated Balance Sheet $ in thousmds/At October 31, Assets Current Assets Cash aril cash equivalents Receivable from sale of St. Joe Gold Accounts and notes receivable Contract work in progress Inventories Other current assets Total current assets Investment w- Bond Portfolio Property, Plant and Equipment Land Buildings and improvements Machinery and equipment Mining properties and mineral rights Construction in progress Less accumulated depreciation, depletion and amortization Net property, plant and equipment Other Assets Investments Other Total other assets 1988 1987 _$ 164,580 396,658 337,347 66,580 33,429 998,594 154,777 $ 74,642 450,00C 353,648 253,742 61,232 20,198 1,213,451 4,00( 61,647 79,550 254,037 395,397 14,209 804,840 75,081 729,759 61,21 77,11 184,92 406,02 5,88 735,18 735,18 94,997 95,219 190,216 $2,073,346 33,1: 75,3 108,5 $2,061,1 30 31 DR 2801235 1988 Liabilities ami Shareholders' Equity Current Liabilities Accounts payable' Advance billings on contracts Accrued salaries and wages and benefit plan liabilities Other accrued liabilities Current portion of long-term debt Income taxes currently payable Deferred income taxes Total current liabilities $ 358,061 118,752 71,535 218,856 58,506 18,338 -- 844,048 Long-Term Debt Due After One Year 94,961 Moncurrent Liabilities Deferred income taxes Accrued lease costs Other 79,063 148,792 304,735 Total noncurrent liabilities 532,590 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 $.625 par value; issued and outstanding in 1988--79,051,744 shares and in 1987--78,939,846 shares Additional capital Retained earnings (since October 31, 1987) Unamortized executive stock plan expense Cumulative translation adjustments 49,407 497,907 54,814 (3,117) 2,736 Total shareholders' equity 601,747 $2,073,346 See Notes to Consolidated Financial Statements. 1987 $ 316,251 87,301 69,838 199,959 11,421 17,075 31,429 733,274 217,762 86,160 178,798 313,449 578,407 49,337 487,435 -- (4,367) (662) 531,743 $2,061,186 DR 2801236 Fluor Consolidated Statement of Cash Flows In thousands/Year ended October 31, Cash Flows From Operating Activities Net income (loss) Depreciation, depletion and amortization Deferred income taxes Amortization of accrued lease costs and deferred gains Provision for sublease losses and write-down of investments Gain on sale of Irvine facility and St. Joe Gold common stock Loss (gain) on disposal of discontinued operations Change in operating working capital Other, net Cash provided (utilized) by operating activities Cash Flows From Investing Activities Capital expenditures Proceeds from safe of property, plant and equipment Investment in bond portfolio Additions to investments Proceeds from sale of discontinued operations, net Partition of Massey assets Proceeds from facility sale leasebacks and St. Joe Gold common stock sale Other, net Cash provided by investing activities Cash Flows From Financing Activities Payments of long-term debt Issuance of debt Cash dividends paid Other, net Cash provided (utilized) by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See Notes to Consolidated Financial Statements. 1988 1987 1986 $ 56,395 76,000 (49,397) (37,009) -- -- -- (43,654) 15,414 17,749 $ 26,592 124,377 62,321 (20,570) --36,845 (215,737) 93,990 (50,482) 57,336 $ (60,443) 129,250 (35,682) --(23,597) (61,881) 44,997 (225,685) 8,891 (224,150) (86,259) 8,960 (150,777) (69,267) --450,000 -- 3,949 156,606 (99,824) 21,738 --(4,000) 147,535 108,148 -- (3,899) 169,698 (91,619) --24,338 -- --131,000 70,700 20,209 154,628 (81,537) 363 (1,581) (1,662) (84,417) 89,938 74,642 $ 164,580 (250,830) 2,809 (7,927) 7,225 (248,723) (21,689) 96,331 $ 74,642 (106,265) 264,983 (31,701) (11,866) 115,151 45,629 50,702 $ 96,331 32 33 DR 2801237 Fluor Consolidated Statement of Shareholders' Equity $ in thousands, except per share amounts Common Year ended October 31.1986,1987 and 1988 Stock Additional Capital Retained Earnings (Deficit) Unamortized Executive Stock Plan Expense Cumulative Translation Adjustments Total Balances at October 31,1985 $49,462 $1,069,624 $ (67,878) $(9,429) $(7,875) $1,033,904 Net loss Cash dividends ($.40 per share) Exercise of stock options, net Amortization of executive stock plan expense Issuance of restricted stock, net Translation adjustment for the period 67 16 (60,443) (31,701) 991 230 3,003 (310) 4,483 (60,443) (31,701) 1,058 3,003 (64) 4,483 Balances at October 31,1986 49,545 1,070,845 (160,022) (6,736) (3,392) 950,240 Net earnings Cash dividends ($.10 per share) Exercise of stock options, net Amortization of executive stock plan expense Repurchase of restricted stock. net Repurchase of common stock Translation adjustment for the period Quasi-reorganization Revaluation adjustments, net Transfer to additional capital 26,592 (7,927) 105 2,260 (20) (293) (563) (5,528) (438,222) (141,357) 141,357 Balances at October 31,1987 49,337 487,435 -- Net earnings 56,395 Cash dividends ($.02 per share) (1,581) Exercise of stock options, net 180 3,771 Amortization of executive stock plan expense Repurchase of restricted stock, net (29) (955) Repurchase of common stock (81) (1,581) Tax benefit of net operating loss 9,237 Translation adjustment for the period Balances at October 31,1988 $49,407 $ 497,907 $ 54,814 1,928 441 (4,367) 326 924 $(3,117) 26,592 (7,927) 2,365 1,928 (142) (5,821) 2,730 2,730 (662) (438,222) -- 531,743 56,395 (1,581) 3,951 326 (60) (1,662) 9,237 3,398 3,398 $ 2,736 $ 601,747 See Notes to Consolidated Financial Statements. DR 2801238 Fluor 34 35 Notes to Consolidated Financial Statements Major Accounting Policies Balance Sheet Revaluation . The consolidated balance sheet at October 31,1987 was adjusted to fair value in accordance with accounting principles applicable to quasi-reorganizations. See Restructuring. Principles of Consolidation The financial statements include the accounts of the company and its subsidiaries. The equity method of accounting is used for investment ownership ranging from 20% to 50%. Investment ownership of less than 20% is accounted for on the cost method. The company does not con solidate entities for which control is deemed temporary. The company recognizes 100% of the operations of certain unconsolidated entities which are under effective control. All significant intercompany transactions of consolidated subsidiaries are eliminated. Certain 1987 and 1986 amounts have been reclassified to conform with the 1988 presentation. Business Ownership Changes Coal--On July 10,1987, the company and two subsidiaries of Shell Oil Company (Shell) completed a partition of Massey Coal Company (Massey) whereby Shell relinquished 99% of its 50% interest in Massey for certain of Massey's operating subsidiaries. The partitioning resulted in no net gain or loss to the company. Prior to the partitioning the company had proportionally consolidated its 50% interest in Massey; subsequently, Massey's operations are fully consolidated to reflect the company's ownership interest. Lead--Effective November 1,1986 the company and Homestake Mining Company transferred all of the assets of their respective domestic lead businesses to The Doe Run Company partnership (Doe Run). Certain reclassifications were made to the historical carrying values of the company's lead operations to reflect the proportional consolidation of the company's 57.5% ownership interest in the partnership. Engineering and Construction Contracts The company recognizes engineering and construction contract revenues using the percentage-ofcompletion method, primarily based on contract costs incurred to date compared with total esti mated contract costs, and using hours incurred to date compared with total estimated hours for the construction of certain power plants. Contracts are segmented between engineering and con struction efforts and, accordingly, gross margin related to each activity is recognized as those sepa rate services are rendered. Changes to total estimated contract costs or hours and losses, if any, are recognized in the period they are determined. Revenues recognized in excess of amounts billed are classified as current assets under contract work in progress. It is anticipated that the incurred costs associated with contract work in progress at October 31,1988, will be billed and collected in 1989. Amounts received from clients in excess of revenues recognized to date are classified as current liabilities under advance billings on contracts. Depreciation and Amortization Additions to property, plant and equipment are recorded at cost. Assets other than mining proper ties and mineral rights are depreciated principally using the straight-line method to amortize the cost of the, assets over their estimated useful lives. Leasehold improvements are amortized over the lives of the respective leases. The excess of cost over net assets of acquired businesses is amortized on the straight-line method, over periods not longer than 40 years. DR 2801239  Exploration and Development Coai--Development costs of specific coal properties, when expected to be significant, are capital ized in mining properties and depleted over the expected economic life of the mine on the units of production method. Lead--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 amortized by the straight-line method over periods approximating the economic life of the mine. Subsequent maintenance and underground development expenditures are generally charged to expense as incurred. Investment in Bond Portfolio The company's bond portfolio is carried at amortized cost which approximates market value. At October 31,1988, the portfolio has a weighted average interest rate of nearly 11 % and maturities ranging from 1989 to 2004. 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 of the completed-contract method of accounting for certain contracts, accelerated depreciation and various accruals. Earnings (loss) per share Earnings (loss) per share is 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 exercise of stock options when the effect of such options is dilutive. Inventories Coal, metals and processed minerals inventories are stated at the lower of cost using the last-in, first-out (LIFO) method or net realizable value. Supplies and other are valued on the average cost method. Inventories comprise: $ in thousands/At October 31, 1988 1987 Coal, metals and processed minerals Supplies and other $34,713 31,867 $37,059 24,173 $66,580 $61,232 Foreign Currency Translation The effects of translating foreign subsidiaries' financial statements are recorded as a separate component of shareholders' equity. Changes in cumulative translation adjustments were as follows: $ in thousands/Year ended October 31, 1988 1987 Balance at beginning of year Translation adjustments Deferred income taxes on translation adjustments $ (662) 5,149 (1,751) $(3,392) 4,712 (1,982) Balance at end of year $ 2,736 $ (662) DR 2801240 Fluor Notes to Consolidated Financial Statements Continued Consolidated Statement of Cash Flows In 1988, the company adopted Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," which requires a statement of cash flows in place of a statement of changes in finan cial position. Prior years' statements of changes in financial position have been restated to conform to the 1988 presentation. The company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Changes in operating working capital as shown in the Consolidated Statement of Cash Flows comprise: $ in thousands/Year ended October 31, 1988 1987 1986 Decrease (increase) in: Accounts, notes and income taxes receivable Contract work in progress Inventories Other current assets Increase (decrease) in: Accounts payable Advance billings on contracts Accrued liabilities Income taxes currently payable $(43,012) (83,605) (5,348) (6,079) 41,810 31,451 19,866 1,263 $41,595 (65,946) 14,466 (7,893) 78,723 25,040 11,964 (3,959) $ (90,744) 83,049 25,330 1,822 (106,352) (16,260) (36,962) (85,568) $(43,654) $ 93,990 $(225,685) Cash paid during the year for: Interest expense Income tax payments (refunds), net $ 16,509 $52,014 $48,871 $(99,433) $ 43,072 $ 143,476 Acquisition and Investments In August 1988, the company purchased Wright Engineers Limited (Wright), for consideration which, depending on future operating results, could approximate a maximum of $8 million. Wright, based in Canada, is a world-recognized leader in the process and detailed design and construction management of gold, copper, uranium, complex sulfides and coal projects. The company's financial statements include the results of Wright on a consolidated basis from the acquisition date. The acquisition has been accounted for as a purchase. Investments included in Other assets relate primarily to entities accounted for on the equity method. Additions to investments in 1988 included $14 million in a resource recovery project, $15 million in Centre Reinsurance and $40 million in SOS International (SOS). In March 1988, the company made an investment, convertible into a controlling equity interest, in SOS, a leading contractor in the asbestos abatement industry. Prior and subsequent to. the com pany's investment, SOS experienced operating losses. The company has significant influence over operating and financial policies and, accordingly, has recognized 100% of SOS's losses from the date of investment. Losses recognized totaled $9 million in 1988, including $2 million of investment amortization. The company's investment in SOS at October 31,1988 exceeded the net assets of SOS by $33 million. 36 37 DR 2801241  Restructuring Quasi-Reorganization At October 31,1987, the company adjusted its balance sheet to fair value and transferred the accumulated deficit of $141 million to Additional capital in accordance with quasi-reorganization accounting principles. Management utilized the services of outside experts in conducting the revaluation. The principal adjustments to fair value included a $267 million reduction in the carrying value of the company's 57.5% interest in Doe Run; reversal of $62 million of deferred gains on sale leaseback transactions; accrual of $125 million for certain lease costs; revaluation of intangibles resulting in the elimination of $151 million of excess of cost over net assets of acquired businesses; recognition of a $22 million net increase in the value of the company's investment in Massey Coal Company; and $21 million net increase in the value of other assets. Management gave consider ation to the carrying values of the company's remaining assets and liabilities and believes they approximated fair value at October 31,1987. The fair value adjustments to the October 31,1987 balance sheet resulted in a net charge to Additional capital of $438 million. Discontinued Operations In the third quarter of fiscal 1987 the company initiated a plan for the divestiture of the assets in its Metals segment, except for its 57.5% interest in Doe Run, which has been retained and reported in continuing operations. Revenues for the discontinued Metals segment were $309 million and $319 million in 1987 and 1986, respectively. In October 1987, the company completed the sale of its 90% interest in St. Joe Gold Corpora tion and other gold properties to Dallhold Investments Pty. Limited for $500 million, of which $50 million was received by October 31,1987. The remaining $450 million was received in November 1987. The sale resulted in a net gain of approximately $248 million. In September 1987, the com pany sold its domestic zinc mining operations to Horsehead Industries for approximately $100 mil lion, including the elimination of $38 million in outstanding debt, resulting in a net loss of $15 million. At October 31,1987 a net charge to discontinued operations of $122 million was made to write down the metals businesses held for sale to their estimated net realizable value. In 1988 dis posals of the remaining base metals businesses held for sale, except Pea Ridge, were completed. The sale of Pea Ridge is expected to be concluded in 1989. During 1986, the company adopted a plan to dispose of its Drilling Services segment. The sale was completed in 1987 for an aggregate sales price of approximately $18 million. Revenues from drilling operations were $18 million in 1986. The following table summarizes the results of discontinued operations and the respective gain (loss) from disposal: $ in thousands/Year ended October 31. 1987 1986 Loss from operations: Metals, net of income tax (expense) benefit of $(4,988) and $5,363, respectively Drilling services, net of income tax benefit of $11,160 $(16,544) -- $ (9,409) (8,070) Gain (loss) on disposal: Metals, net of income tax expense of ($104,483) Drilling services, net of income tax benefit of $20,650 (16.544) 111,254 -- (17,479) -- (24,347) Earnings (loss) from discontinued operations $ 94,710 $(41,826) DR 280124 Fluor 38 39 Notes to Consolidated: Financial Statements Continued Income Taxes The income tax benefit (expense) included in the Consolidated Statement of Operations is as follows: $ in thousands/Year ended October 31, 1988 1987 1986 Current: Federal (Includes a charge in lieu of taxes of $7,319 and $7,157 for 1988 and 1987, respectively) Foreign (Includes a charge in lieu of taxes of $1,918 in 1988) State and local $(69,706) (8,430) (5,761) $ 12,881 (4,718) (4,505) $ 64,333 (18,249) (8,256) Total current (83,897) 3,658 37,828 Deferred: Federal Foreign State and local 52,961 (3,655) 91 (64,677) 271 2,085 29,805 3,208 2,669 Total deferred 49,397 (62,321) 35,682 Total income tax benefit (expense) $(34,500) $(58,663) $73,510 The income tax benefit (expense) applicable to continuing and discontinued operations is as follows: $ in thousands/Year ended October 31, 1988 1987 Provision for continuing operations: Current Deferred $ 67,007 (101,507) $ (17,292) 68,100 Total provision--continuing operations (34,500) 50,808 Provision for discontinued operations: Current Deferred (150,904) 150,904 20,950 (130,421) Total provision--discontinued operations -- (109,471) Total income tax benefit (expense) $ (34,500) $ (58,663) 1986 $13,781 22,556 36,337 24,047 13,126 37,173 $73,510 A reconciliation of statutory federal income tax to the income tax benefit (expense) on the earnings (loss) from continuing operations follows: $ in thousands/Year ended October 31, 1988 1987 1986 Statutory federal income tax benefit (expense) Reductions (increases) in taxes resulting from: Depletion Earnings (losses) without tax effect Effect of foreign tax rates State and local income taxes Amortization and write-down of property, plant and equipment Tax credits Amortization and write-off of excess of cost over net assets of acquired businesses Accruals without tax effect Capital gain rate differential Nontaxable gain on sale of St. Joe Gold common stock Indefinitely reinvested foreign earnings Other, net $(30,904) 9,343 (5,955) (3,790) (3,742) (2,206) 1,082 (877) (292) -- -- -- 2,841 $52,955 7,783 2,459 -- (1,259) (8,650) 2,631 (2,087) (5,094) 2,247 -- -- (177) $ 25,279 7,218 5,428 (6,840) (1,392) (10,762) 5,178 (2,284) 1,691 11,356 11,087 (7,000) (2,622) Total income tax benefit (expense) $(34,500) $50,808 $ 36,337 DR 2801243 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 oper ations is primarily attributable to capital gain rates and foreign tax credits. The deferred income tax benefit (expense) applicable to timing differences from continuing oper ations are as follows: $ in thousands/Year ended October 31, 1988 1987 1986 Reduction (increase) in deferred tax credits Accruals not currently reportable for tax purposes Use of different methods of accounting for construction contracts Residual tax on undistributed foreign earnings Deferred gains on property sales Other, net $ (51,565) (33,964) (6,538) 1,064 (317) (10,187) $ 51,565 10,603 21,841 (13,477) (5,699) 3,267 $-- 8,623 (4,033) 14,652 1,011 2,303 Total $(101,507) $68,100 $22,556 Continuing operations in 1987 were benefitted by $52 million through reductions of deferred tax credits arising from deferral of the proceeds on disposal of discontinued operations. United States and foreign earnings (losses) from continuing operations before income taxes are as follows: $ in thousands/Year ended October 31, 1988 1987 1986 United States Foreign $63,843 27,052 $(157,812) 31,729 $(74,984) 20,030 Total $90,895 $(126,083) $(54,954) Residual income taxes have not been provided on approximately $42 million of undistributed earn ings of certain foreign subsidiaries at October 31,1988 because the company intends to reinvest these earnings indefinitely. A.T. Massey Coal Company, Inc. and its subsidiaries file a separate consolidated tax return and have available net operating loss carryforwards of $71 million which expire at varying dates through 2000. Utilization of these carryforwards may result in reduction of future tax payments. 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 1981. The company is following the appropriate IRS appeals process in settling certain issues raised by the IRS. Examinations of fiscal years 1980 through 1983 are in process and no material adjustments have been proposed by the IRS. Management believes that the resolution of all tax issues will not have a material adverse effect on the company's consolidated financial position or results of operations. In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 96 "Accounting for Income Taxes." Management believes that imple mentation, which is not required until 1991, would not have a material effect on the 1988 consol idated results of operations or financial position of the company. 2801244 Fluor Notes to Consolidated Financial Statements Continued Retirement Benefits The company sponsors defined contribution retirement and noncontributory defined benefit pen sion plans for eligible employees. Contributions to defined contribution retirement plans are based on a percentage of employees' compensation. Expense recognized for these plans is primarily re lated to Engineering and Construction operations and totaled $42 million in 1988, $33 million in 1987 and $36 million in 1986. Contributions to defined benefit pension plans are generally at the minimum annual amount required by applicable regulations. Payments to retired employees under these plans, which are primarily related to natural resource operations, are generally based upon length of service and a percentage of qualifying compensation. Net periodic pension cost for continuing operations defined benefit pension plans includes the following components: $ in thousands/Year ended October 31, 1988 1987 1986 Service costs--benefits earned during the period Interest cost on projected benefit obligation Less--income and gain on assets invested $ 3,156 5,724 (8,683) $ 4,064 4,922 (5,891) $ 4,500 4,330 (4,379) Net periodic pension cost $ 197 $3,095 $ 4,451 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 The following table sets forth the status of the defined benefit plans: $ in thousands/At October 31, Actuarial present value of benefit obligations: Vested benefit obligation Nonvested benefit obligation 1988 $ 41,114 10,507 Accumulated benefit obligation $ 51,621 8.0 -9.0% 5.0-7.5% 8.0-9.0% 1987 $ 43,468 4,878 $ 48,346 Plan assets at fair values (primarily listed stocks and bonds) Projected benefit obligation Plan assets in excess of projected benefit obligation Unrecognized net gain Pension asset recognized in the Consolidated Balance Sheet $121,271 (69,487) 51,784 (9,703) $ 42,081 $107,013 (67,964) 39,049 -- $ 39,049 All previously unrecognized net gain and asset at implementation were recognized in 1987 in connection with the quasi-reorga nization and partitioning of Massey. Excludes the projected benefit obligation and associated plan assets relating to present and former employees of discontinued operations of $124 million and $111 million at October 31,1988 and 1987, respectively. Massey participates in multiemployer defined benefit pension plans for its union employees. Pension expense related to these plans was approximately $.4 million, $1 million and $1 million in the years ended October 31,1988,1987 and 1986, respectively. The company and certain of its subsidiaries provide health care and life insurance benefits for certain retired employees. The cost of such benefits for continuing operations, which approxi mated $4 million in 1988 and $3 million in both 1987 and 1986, is expensed when paid. 40 41 DR 2801245 Long-Term Debt Long-term debt comprises: $ in thousands/At October 31, Term loans, 9.3%. due in installments through 2000 Eurodollar zero coupon debentures, effective interest rate 14%, due in 1990 (net of unamortized discount of $6,511 and $13,802, respectively) 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 Serial zero coupon notes, effective interest rate 14.3%, due in installments through 1989 (net of unamortized discount of $955 and $3,515, 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 Other notes and mortgages Less: Current portion Long-term debt due after one year 1988 $ 40,100 31,176 28,578 18,077 16,196 15,039 4,301 153,467 58,506 $ 94,961 1987 $ 46,800 35,934 46,879 20,437 32,210 36,173 10,750 229,183 11,421 $217,762 Maturities relating to long-term debt are as follows for the years ending: 1990, $31.6 million; 1991, $.3 million; 1992, $.3 million; 1993, $31.4 million; and $31.4 million thereafter. The company has unsecured committed revolving long-term lines of credit with banks from which it may borrow for general corporate purposes up to a maximum of $285 million, of which $250 million can convert to four-year term loans. Commitment fees are paid on unused portions of these lines. In addition, at October 31,1988 the company had $114 million in unused short-term lines of credit. At October 31,1988, no amounts were outstanding under these lines. 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 31,1988 bears interest at fixed rates. Stock Plans The company has four executive stock plans, the 1971 Fluor Stock Option Plan, the 1977 and 1981 Fluor Executive Stock Plans and the 1982 Fluor Executive Stock Option Plan. These plans provide for grants of nonqualified or incentive options at prices equal to the fair market value of the com pany's common stock at date of grant. ' The 1977 and 1981 Plans also provide for rights to acquire shares under restricted stock agree ments at $.33V3 per share under the 1977 Plan and at no charge under the 1981 Plan. Upon termi nation of employment for reasons other than retirement, death or permanent disability of the recipient, the stock must be returned to the company for the amount, if any, originally paid. At Oc tober 31,1988, a total of 1,417,358 restricted shares had been awarded and a total of 96,232 shares were available for award as restricted stock. In addition, the company has the 1979 and 1980 Fluor Stock Appreciation Rights Plans. On exercise, the holder of the rights receives the excess of market value of the rights on exercise date over the market value of the rights on the grant date. Such market values are equal to the market value of the company's common stock. Changes in market value are accounted for currently as compensation expense. The company has adopted, subject to shareholder approval, the 1988 Fluor Executive Stock Plan which provides, among other things, for the granting of up to 3,000,000 addi tional stock options or stock appreciation rights ("SAR's"). On September 12,1988, 85,752 SAR's were contingently awarded pursuant to this plan. DR 2801246 Fluor 42 43 Notes to Consolidated Financial Statements Continued Options and stock appreciation rights granted are generally exercisable one year after the date of grant or in installments of 25% per year commencing one year from date of grant. All options expire ten years after date of grant. The following table summarizes stock option and SAR activity for the two years ended October 31,1988: Price Value Shares Per Share SAR Per Right Outstanding at October 31,1986 Granted Expired or cancelled Exercised 2,634,890 1,655,369 (1,125,618) (285,609) $11-34 12-19 12-34 11-18 768,799 826 (41,151) (31,980) $13-34 12 12-22 13-18 Outstanding at October 31,1987 2.879,032 11-34 696,494 12-34 Granted Expired or cancelled Exercised 413,704 (231,690) (298.145) 20-22 11-34 11-22 363,544 (69,597) (107,251) 20-22 12-22 12-22 Outstanding at October 31,1988 2,762,901 $11-34 883,190 $12-34 Exercisable at: October 31,1987 October 31,1988 Available for grant at: October 31,1987 October 31,1988 799,713 990,315 335,854 154,090 $11-34 $11-34 305,912 309,650 299,626 5,679 $12-34 $12-34 The company adopted a preferred shares purchase rights plan and, pursuant thereto issued one preferred share purchase right ("Right") on each outstanding share of common stock. The Rights are exercisable only if a person or group acquires, or makes a tender offer for, 20% or more of the company's common stock. When exercisable, each Right entitles its holders to buy Viooth share of a newly issued preferred stock at an exercise price of $40, subject to certain antidilution adjust ments. The Board of Directors, at its option, may lower the exercisability threshold from 20% to as low as 10% so long as no person or group then owns more than the lowered amount and may, at any time after the rights have become exercisable, but before there has been an acquisition of 50% or more by any person or group, exchange each then valid right for one new share of com mon stock. However, the rights do not become exercisable when, as a result of a single purchase, the common stock ownership of a person or group goes from below the exercisability threshold to 85% or more of the amount outstanding. Also, if at any time after the Rights become exercisable, the company is either involved in a merger or other business combination transaction, or 50% or more of its consolidated assets or earning power is sold, or a person or group acquires 20% or more of the company's common stock, then each Right will entitle its holder to purchase common stock of the company or the acquiring company having a market value of twice the exercise price of the Right. The Rights, which do not have voting privileges, may be redeemed by the company at a price of $.02 per Right at any time prior to public announcement that a person or group has acquired beneficially 20% or more of the company's common shares. The Rights will also be automatically redeemed under certain circumstances if a majority of shareholders approve the terms of a bid to acquire 100% of the company's common stock which is made by a person or group owning less than 1% of the company's common stock. The Rights expire on November 30,1997. DR 2801247  Lease Obligations Total rental expense for continuing operations amounted to $89 million, $84 million and $87 million, in 1988,1987 and 1986, respectively. The company's lease obligations relate primarily to office facilities, data processing equipment, equipment used in connection with long-term construction contracts and other personal property. The company's obligations under noncancellable leases for minimum rentals offset by cash flows from the bond portfolio are as follows: $ in thousands/At October 31,1988 Gross Rentals Cash Flows from Bond Portfolio Present Net Value* 1989 1990 1991 1992 1993 Thereafter $ 74,484 69,388 61,576 57,947 57,170 328,073 $ 19,275 18,781 20,857 17,785 19,994 247,685 $ 55,209 50,607 40,719 40,162 37,176 80,388 $ 55,209 45,592 33.048 29,366 24,489 39,506 $648,638 $344,377 $304,261 $227,210 *The present value of net 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 11%. At October 31,1988 and 1987, obligations under capital leases of $14 million and $15 million, respectively, are included in Other noncurrent liabilities. Contingencies, Commitments and Restrictions 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 current contract provisions. The company's natural resource operations are affected by federal, state and local laws and regulations regarding environmental protection. The outcome or timing of current environmental matters or the full impact, if any, of such legisla tive or regulatory developments on future operations is not currently estimable. In the opinion of management, finalization of these matters will not have a material adverse effect on the com pany's consolidated financial position or results of operations. At October 31,1988, $140 million of net assets of Doe Run, including $39 million of working capital, have restrictions. Concurrence of the partners is required to transfer assets in the form of advances, loans or other distributions outside the Partnership. Operations by Business Segment and Geographic Area The Engineering and Construction segment includes subsidiaries engaged in the design, engineer ing, procurement, construction, technical services and maintenance of facilities for industrial, com mercial, utility, natural resource, energy and government clients. Coal segment amounts through June 1987 represent 50% of Massey's operations. Commencing July 1987 Coal segment amounts include the operations of Massey after the partitioning with Shell Oil. Through 1986, the Lead seg ment represents 100% of the company's domestic lead operations. Beginning in 1987 the Lead segment represents the company's 57.5% interest in the operations of Doe Run. Identifiable assets are those tangible and intangible assets used in the operation of each of the business segments and geographic areas. Corporate assets are principally cash, cash equivalents and nontrade receivables. Sales to customers in foreign countries from domestic operations comprise less than 10% of total revenues in each of the last three years. In 1988 and 1987 no single customer accounted for more than 10% of revenues. Contracts with one major customer accounted for $574 million, or 15%, of Engineering and Construction revenues during 1986. DR 2801248 Fluor Notes to Consolidated Financial Statements Continued $ in millions Operations by Business Segment Engineering and Construction Coal Lead Continuing Operations 1988 Revenues 1987 1986 $4,225.2 783.7 123.6 $5,132.5 $3,251.3 580.1 93.1 $3,924.5 $3,727.8 516.9 97.0 $4,341.7 Operating Profit (Loss) 1988 1987 1986 $ 50.8 50.4 29.0 $(49.5) 28.3 (5.5) $(71.2) 49.3 (26.6) $130.2 $(26.7) $(48.5) $ in millions Engineering and Construction Coal Lead Corporate Continuing Operations Discontinued Operations 1988 $ 886.9 667.7 159.8 358.9 Identifiable Assets 1987 1986 $ 620.4 657.5 154.6 621.9 $ 582.3 789.8 445.7 225.5 2,073.3 -- $2,073.3 2,054.4 6.8 $2,061.2 2,043.3 522.1 $2,565.4 Capital Expenditures 1988 1987 1986 $46.8 30.6 8.7 0.2 $37.4 25.0 5.1 -- $25.6 26.9 3.8 0.3 86.3 -- 67.5 32.3 56.6 35.0 $86.3 $99.8 $91.6 Depreciation, Depletion and Amortization 1988 1987 1986 $23.9 38.3 10.1 3.7 $ 21.1 39.5 22.9 1.7 $ 21.3 37.3 29.0 1.7 76.0 -- $76.0 85.2 39.2 $124.4 89.3 40.0 $129.3 $ in millions 1988 Revenues 1987 1986 Operations by Geographic Area United States $4,444.6 Canada 257.9 Middle East 55.1 Europe 296.6 Other 78.3 $3,461.9 220.1 70.7 . 99.2 72.6 $3,756.0 79.0 91.6 304.9 110.2 $5,132.5 $3,924.5 $4,341.7 Operating Profit (Loss) 1988 1987 1986 $120.1 2.2 (0.6) 7.3 1.2 $(29.0) 1.8 (1.6) (0.1) 2.2 $(48.7) 3.2 0.3 0.9 (4.2) $130.2 $(26.7) $(48.5) 1988 Identifiable Assets 1987 1986 $1,862.1 53.9 49.2 74.6 33.5 $2,073.3 $1,830.7 61.9 39.9 89.5 39.2 $2,061.2 $2,062.2 31.5 59.6 73.8 338.3 $2,565.4 The following table reconciles business segment operating profit (loss) with the earnings (loss) from continuing operations before income taxes: $ in millions/Year ended October 31, 1988 1987 1986 Operating profit (loss) from continuing operations Interest, net Equity in loss of SOS Gain on sale of Irvine facility and St. Joe Gold common stock Provision for future losses on facility subleases and certain investments Corporate administrative and general expense Other items, net $130.2 9.8 (9.5) -- -- (32.8) (6.8) $ (26.7) (40.1) -- -- (36.8) (24.1) 1.6 $(48.5) (39.8) -- 61.9 -- (32.5) 3.9 Earnings (loss) from continuing operations before income taxes $ 90.9 $(126.1) $(55.0) 44 45 DR 2801249 Fluor Quarterly Financial Data unaudited The following is a summary of the quarterly results of operations: $ in thousands, except per share amounts First Quarter Second Quarter Revenues from continuing operations Gross margin Earnings before income taxes Net earnings Earnings per share $1,039,320 18,875 16,264 9,016 $ .11 $1,148,466 21,899 15,654 10,302 $ .13 Third Quarter $1,339,106 30,442 23,144 13,444 $ .17 Fourth Quarter $1,605,565 52,124 35,833<a 23,633 $ .30 $ in thousands, except per share amounts First Quarter Second Quarter Third Quarter Fourth Quarter Revenues from continuing operations Gross margin (loss) Loss from continuing operations before income taxes Earnings (loss) from continuing operations Earnings (loss) from discontinued operations: Operations Disposal Extraordinary item Net earnings (loss) Earnings (loss) per share Continuing operations Discontinued operations Extraordinary item Net earnings (loss) $ 903,158 (6,175) (23,384) (28,564) (4,754) -- -- (33,318) (.36) __(.06) $ (.42) $ 898,563 (19,913) (36,824) (42,944) (9,681) -- -- (52,625) (.54) (.12) -- $ (.66) $ 909,235 (5,144) (21,841) (27,941) (4,981) - -- (32,922) (.35) (.07) -- $ (.42) $1,213,524 6,198 (44,034) 24,174`b> 2,872 111,254 7,157 145,457 .30 1.43 .09 $ 1.82 (a,Fourth quarter 1988 results include $7 million related to a favorable settlement with the United Mine Workers. (b)Fourth quarter 1987 results include an income tax benefit of $52 million related to cumulative year-to-date operating losses which was recognized in the fourth quarter due to the gain on disposal of discontinued operations. DR 2801250 Fluor 46 47 Directors David 8. Tappan, Jr. Chairman of the Board and Chief Executive Officer (1965) Caroline L Aiimanson Chairman Emeritus, Federal Reserve Bank of San Francisco--12th District (1985) Hugh K. Coble Group President. Operations, Fluor Daniel, Inc, (1984) Peter J. Fluor President of Texas Crude, Inc. (1984) David P. Gardner President, University of California (1988) Gerald M. Glenn Group President, Marketing and Sales, Fluor Daniel, Inc. (1989) William R. Grant Chairman of the Board of New York Life International Investment Inc. (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) Vincent L. Kontny President and CEO, Fluor Daniel, Inc. (1988) Robert V. Lindsay Chairman, The International Council, Morgan Guaranty Trust Company of New York (1982) E. Morgan Massey President, A. T. Massey Coal Company, Inc. (1987) Leslie G. McCraw President (1984) Buck Mickel Retired, former Vice Chairman of the Board (1977) Allen E. Puckett Chairman Emeritus of Hughes Aircraft Company (1987) Louis H. Wilson General, U.S. Marine Corps (Retired) and former Commandant of the Marine Corps (1979) Executive Committee David S. Tappan, Jr., Chairman Hugh K. Coble Gerald M. Glenn Robert L. Guyett Vincent L. Kontny E. Morgan Massey Leslie G. McCraw P. Joseph Trimble (ex officio) Audit Committee William R. Grant, Chairman Peter J. Fluor David P. Gardner Bobby R. Inman Louis H. Wilson Nominating Committee David S. Tappan, Jr., Chairman Peter J. Fluor William R. Grant Bobby R. Inman Robert V. Lindsay Louis H. Wilson Organization and Compensation Committee Louis H. Wilson, Chairman Caroline L. Ahmanson William R. Grant Robert V. Lindsay Allen E. Puckett Years in parentheses indicate the year each director was elected to the Board. Except as otherwise indicated, all offices are of the company. 2801251 DR Officers Principal Subsidiaries and Divisions Executive Corporate Officers David S. Tappan, Jr. Chairman of the Board and Chief Executive Officer (1952) Leslie G. McCraw President (1975) Robert L. Guyett Senior Vice President and Chief Financial Officer (1987) P. Joseph Trimble Senior Vice President-Law (1972) Nad A. Peterson Senior Vice President and Secretary (1967) Corporate Officers Charles J. Bradley Vice President-Human Resources and Administration (1958) Lawrence N. Fisher Vice President-Corporate Law (1974) J. Robert Fluor II Vice President-Corporate Relations (1967) William M. Hofacre Vice President-Financial Planning & Analysis (1984) Larry W. Lineberger Vice President and Controller (1971) Richard D. Paul Vice President-Financial and Operational Evaluation (1968) James O. Rollans Vice President-Corporate Communications (1982) William D. Trammell Vice President-Project Finance (1968) Fluor Daniei Executive Officers Vincent L. Kontny President and CEO. Fluor Daniel, Inc. (1965) Hugh K. Coble Group President, Operations (1966) Gerald fi/L Glenn Group President, Marketing and Sales (1964) Key Fluor Daniel Operating/ Marketing Executives Industrial Sector James C. Stein President (1964) Richard M. Teater Vice President-Marketing (1980) Process Sector Paul J. Varello President (1972) Steven G. Tappan Vice President-Marketing (1977) Power Sector Peter S. Van Nort President (1980) Michael J. Epprecht Vice President-Marketing (1979) Hydrocarbon Sector Charles R. Oliver President (1970) Dennis G. Bernhart Vice President-Marketing (1968) Government Sector Emil J. Parents President (1978) Thomas P. Merrick Vice President-Marketing (1984) Operations Centers Larry M. Hart President (1967) International Charles R. Cox President (1969) Charles P. Pringle Vice President-Marketing (1970) Asia/Pacific James E. Barry President (1976) Richard D. Carano Vice President-Marketing (1970) Canada A. B. McArthur President (1975) Frank JL Vbnginhoven Vice President-Marketing (1976) Europe/ Africa / Middle East Richard W. Dean President. (1967) Henry C. Van Dyke Vice President-Marketing (1974) Venture Group John QL Simpson President (1983) Other Key Operating/Staff Executives A.T. Massey Coal Company, Inc. E. Mortpn Massey President (1947) Fluor Constructors International, Inc. Richard A. Flinton President (1960) Government Relations Betty L. Hudson Vice President (1974) Engineering and Construction Fluor Daniel, Inc. Industrial Sector, Greenville, South Carolina Process Sector, Greenviiie, South Carolina Power Sector, Greenville, South Carolina Hydrocarbon Sector, Irvine, California Government Sector, Irvine, California U.S. Operations Centers Chicago Greenville Houston Irvine Philadelphia International Operations Daniel International (Saudi Arabia! Ltd., Jeddah, Saudi Arabia Fluor Arabia Limited, Al-Khobar, Saudi Arabia Fluor Daniel Australia Limited, Melbourne, Victoria, Australia Fluor Daniel Canada, Inc., Calgary, Alberta, Canada Wright Engineers Limited, Vancou ver, British Columbia, Canada Fluor Daniel B.V., Haarlem, The Netherlands Fluor Daniel GmbH, Dusseldorf, West Germany Fluor Daniel Limited, London, England SOS International, South San Francisco, California Daniel International Corporation, Greenville, South Carolina Fluor Constructors International, Inc., Irvine, California Natural Resource Investments A.T. Massey Coal Company, Inc., Richmond, Virginia The Doe Run Company, St. Louis, Missouri Years in parentheses indicate the year each officer cc executive joined the company. Except as otherwise indicated ail offices are of the company. DR 2801252 Fluor Stockholders' Reference Common Stock and Dividend Information Form 10-K A copy of the Form 10-K, which ts filed with the Securities and Exchange Commission 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, Corpo rate Services Division, 333 South Beaudry Avenue, 24th Floor, Los An geles, California 90017, and Security Pacific National Trust Company, 2 Rector Street, 9th 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. Independent Public Accountants Arthur Young & Company, 3200 Park Center Drive, Costa Mesa, California 92626 Annual Stockholders' Meeting Annual report and proxy statement are mailed about February 1, Fluor's annual meeting of stockholders will be held at 9:00 a.m. on March 14, 1989 at the Meridien Flotel, 4500 MacArthur Boulevard, Newport Beach, California 92660. Company Contacts Stockholders may call collect. Stockholder information: Lawrence N. Fisher (714) 975-6961 Investor Relations: Lila J. Churney (714) 975-3909 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. Price Range Dividends Per Share High Low Fiscal 1988 First Quarter Second Quarter Third Quarter Fourth Quarter $-- -- -- 0.02 $1572 19% 23'A 23'A $1 1 7a 1214 17% 1972 $0.02 Fiscal 1987 First Quarter Second Quarter Third Quarter Fourth Quarter $0.10 -- -- -- $0.10 $U'A 16V2 20 Vs 21% $11 7a 127a 1474 11 Common Stock Information At December 31,1988 there were 79,134,524 shares outstanding and approximately 23,200 stockholders of record of Fluor's common stock. 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 12/15/61 03/11/63 03/09/64 03/08/65 02/14/66 03/24/66 03/27/67 02/09/68 03/22/68 05/16/69 03/06/70 03/05/71 03/10/72 03/12/73 03/11/74 08/13/79 07/18/80 20% Stock Dividend 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 2 for 1 Stock Split 5% Stock Dividend 5% Stock Dividend 2 for 1 Stock Split 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 5% Stock Dividend 3 for 2 Stock Split 3 for 2 Stock Split 2 for 1 Stock Split DR 2801253 48