Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements.
Results of Operations
In early 2020, we decided to retain our government business, which had been included in Disc Ops since the third quarter of 2019. As a result, the government business is no longer reported as a discontinued operation for any period presented. Our plan to sell the AMECO equipment business remains unchanged and it remains reported as a discontinued operation. We expect to complete the sale of the AMECO equipment business within the first half of 2021. The assets and liabilities of the AMECO business are classified as held for sale for all periods presented.
In light of our decision to retain our government business in 2020, we had the following six reportable segments:
◦Energy & Chemicals
◦Mining & Industrial
◦Infrastructure & Power
◦Government
◦Diversified Services
◦Other
Beginning in the first quarter of 2021, we will operate through three business segments: Energy Solutions, Urban Solutions and Mission Solutions. Energy Solutions will focus on energy transition, chemicals and traditional oil and gas opportunities. Urban Solutions will focus on mining, metals, advanced technologies, manufacturing, life sciences, infrastructure and our professional staffing services. Mission Solutions will focus on delivering solutions to federal agencies across the U.S. government and to select international opportunities. Additionally, we are initiating plans to sell Stork.
During 2019, we approved and initiated a broad restructuring plan designed to optimize costs, improve operational efficiency and support long-term sustainable growth. These restructuring activities included the rationalization of resources, investments, real estate and overhead across various geographies. We also met with a number of our clients, subcontractors
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and suppliers in an attempt to bring resolution to or get clarification on a variety of matters, including outstanding disputes and claims, pending change orders, schedule extensions, accounts receivable and other project close out items. The negotiations and agreements resulting from these meetings, as well as project developments during the second quarter, resulted in the recognition of significant charges across three segments, which are reflected in the results for 2019.
YEAR ENDED DECEMBER 31,
Revenue
Segment profit (loss) $ and margin %
Impairment, restructuring and other exit costs (305.6) (532.6) —
Gain (loss) on pension settlement 0.4 (137.9) (21.9)
Earnings (loss) attributable to NCI from Cont Ops 68.3 (31.0) 59.4
Earnings (loss) from Cont Ops before taxes (207.0) (1,071.5) 385.7
New awards
New awards related to projects located outside of the U.S. 58% 51% 80%
(1)Total segment profit (loss) is a non-GAAP financial measure. We believe that total segment profit (loss) provides a meaningful perspective on our results as it is the aggregation of individual segment profit (loss) measures that we use to evaluate and manage our performance.
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Backlog
Backlog related to projects located outside of the U.S. 64% 67%
Backlog related to lump-sum projects 55% 52%
Our business has been adversely affected by the economic impacts of the outbreak of COVID-19 and the steep decline in oil prices that occurred in the early part of 2020. These events have created significant uncertainty and economic volatility and disruption, which have impacted and may continue to impact our business. We have experienced, and may continue to experience, reductions in demand for certain of our services and the delay or abandonment of ongoing or anticipated projects due to our clients’, suppliers’ and other third parties’ diminished financial condition or financial distress, as well as governmental budget constraints. Although we initially assessed our project estimates for COVID-19 during the first quarter of 2020, continued isolation of estimated COVID-19 effects became increasingly difficult to measure as 2020 progressed. Our estimates reflect our best assessment of project results inclusive of COVID-19 effects, which have been dynamic as our projects have seen changes in prevailing regulations as COVID cases crested and fell. These impacts may continue or worsen under prolonged stay-at-home, social distancing, travel restrictions and other similar orders or restrictions. Significant uncertainty still exists concerning the magnitude of the impact and duration of these events.
Because of the foregoing matters, we performed interim impairment testing of our goodwill, intangible assets and investments. We also evaluated the impact of these events on our reserves for credit risk and the fair value of our assets held for sale.
During 2020, we recognized the following significant charges:
• $298 million for impairments of goodwill, intangible assets, investments and other assets;
• $60 million for current expected credit losses associated with Energy & Chemicals clients;
• $146 million for impairments of assets held for sale (included in Disc Ops), of which $12 million related to goodwill; as well as
• Significant forecast revisions for project positions due to COVID-19 related schedule delays and associated cost growth.
During 2019, we recognized charges (related to cumulative catch up adjustments and loss projects) totaling $839 million in the Energy & Chemicals, Infrastructure & Power and Other segments. We also recognized $533 million related to impairments, restructuring and other exit costs. Additionally, we settled the remaining obligations associated with our defined benefit pension plan in the United Kingdom and recognized a loss on pension settlement of $138 million during 2019. During 2018, we recognized charges totaling $417 million related to projects in the Energy & Chemicals, Infrastructure & Power and Other segments. These project charges were partially offset by a gain of $125 million from the sale of a joint venture interest in the United Kingdom. Earnings in 2018 also benefitted from the adoption of ASC 606 which increased earnings before taxes by $132 million, primarily in the Energy & Chemicals segment.
During 2020, consolidated revenue declined primarily due to volume declines on Energy & Chemicals and Mining & Industrial projects, many of which were completed or nearing completion. The revenue decline in 2020 was further compounded by COVID-19 and the decline in oil prices. For example, a large mining project was suspended for six months due to COVID-19 and the volume of work in the Diversified Services segment significantly declined as turnaround work was delayed and maintenance scopes reduced. During 2019, consolidated revenue declined primarily due to volume declines on Energy & Chemicals projects as well as the completion of a power restoration project in Puerto Rico in 2018 and three large power projects in 2019.
During 2020, total segment profit increased due to the project charges in the Energy & Chemicals, Infrastructure & Power and Other segments recognized in 2019 (discussed above). The increase in total segment profit in 2020 was diminished
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by the impact of COVID-19 on numerous projects in 2020. During 2019, total segment profit significantly declined due to the 2019 project charges in the Energy & Chemicals, Infrastructure & Power and Other segments.
The effective tax rate from continuing operations was (9.0%), (45.3%) and 44.9% for 2020, 2019, and 2018, respectively. The 2020 effective tax rate was favorably impacted by a $125 million benefit due to the utilization of a 2019 net operating loss carryback as allowed under the CARES ACT enacted on March 27, 2020. This benefit was offset by a $149 million increase in valuation allowances to reduce deferred tax assets primarily in the U.S. and the Netherlands. The 2019 effective tax rate was unfavorably impacted by $731 million in charges related to establishing valuation allowances to reduce net deferred tax assets in the U.S., the U.K. and Australia. The 2018 effective tax rate was unfavorably impacted due to a $79 million increase in valuation allowances to reduce certain deferred tax assets in the U.S., the Netherlands and Belgium.
Our results reported by foreign subsidiaries with non-U.S. dollar functional currencies are affected by foreign currency volatility. When the U.S. dollar appreciates against the non-U.S. dollar functional currencies of these subsidiaries, our reported revenue, cost and earnings, after translation into U.S. dollars, are lower than what they would have been had the U.S. dollar depreciated against the same foreign currencies or if there had been no change in the exchange rates.
Our margins, in some cases, may be favorably or unfavorably impacted by a change in the amount of materials and customer-furnished materials, which are accounted for as pass-through costs.
The lack of broad based new awards could continue to put pressure on our future earnings streams, particularly in the Energy & Chemicals segment. Backlog included $1.8 billion for projects in a loss position as of December 31, 2020. The decline in backlog during 2020 and 2019 primarily resulted from new award activity being outpaced by work performed. During 2019, certain suspended contracts associated with our joint venture in Mexico were removed from backlog. Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Backlog differs from RUPO discussed elsewhere. Backlog includes the amount of revenue we expect to recognize under ongoing operations and maintenance contracts for the remainder of the current year renewal period plus up to three additional years if renewal is considered to be probable, while RUPO includes only the amount of revenue we expect to recognize under ongoing operations and maintenance contracts with definite terms and substantive termination provisions.
Impairment, Restructuring and Other Exit Costs
During 2019, we initiated a restructuring plan designed to optimize costs and improve operational efficiency. These efforts primarily relate to the rationalization of resources, investments, real estate and overhead across various geographies, as well as the liquidation of certain components of the AMECO business that are being excluded from sale. Our planned restructuring activities were substantially completed by the end of 2020. Restructuring costs totaled $8 million and $240 million during 2020 and 2019, respectively.
Information about our restructuring, which we believe is complete as of December 31, 2020, follows:
(in millions) Costs Incurred in 2020 Costs Incurred in2019
Restructuring and other exit costs:
Asset impairments 0.4 90.4
Other exit costs 1.0 2.0
Total restructuring and other exit costs $ 8.0 $ 240.0
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Impairment expense is summarized as follows:
Year Ended December 31,
Impairment expense:
Intangible customer relationships associated with Stork 26,671 33,657
Equity method investments in the Energy & Chemicals segment 86,096 256,769
Information technology assets 16,269 —
In the first quarter of 2021, we announced a plan to sell Stork. Beginning in the first quarter of 2021, we expect Stork will be reported as a discontinued operation and the assets and liabilities of Stork will be classified as held for sale. Once classified as available for sale, Stork's assets will be subjected to a quarterly recoverability analysis.
Segment Operations
We provide professional services in the fields of engineering, procurement, construction, fabrication and modularization, operations, maintenance and asset integrity, as well as project management services, on a global basis and serve a diverse set of industries worldwide. We consider charges to include effects that negatively impact a project's gross margin, including negative adjustments to revenue and recognition of project losses.
Energy & Chemicals
Revenue in 2020 decreased compared to 2019 due to significant declines in the volume of execution activities for numerous upstream, downstream and chemicals projects nearing completion, partially offset by increased execution activity for an LNG project in Canada. Revenue in 2019 decreased compared to 2018 due to a significant decline in the volume of customer-furnished materials and project execution activities, combined with the impact of a lower volume of broad based new awards. The revenue decline in 2019 was also partially offset by increased execution activity for the LNG project.
Segment profit significantly increased during 2020 despite the adverse impacts of the recognition of reserves totaling $60 million for expected credit losses associated with certain joint venture clients, as well as margin diminution on a percentage-of-completion basis resulting from project positions taken with respect to COVID-19 related schedule delays and associated cost growth. The increase in segment profit during 2020 is primarily the result of charges taken during 2019, discussed below. Excluding these items, segment profit declined in 2020 due to the reduced execution activity of the upstream, downstream and chemicals projects discussed above, partially offset by the increase in activity for the LNG project and a decrease in overhead.
Segment profit in 2019 significantly decreased compared to 2018 as a result of charges taken during 2019 including $260 million for cost growth on an offshore project, $87 million for cost growth on two downstream projects and scope reductions on a large upstream project, $26 million for the write-off of pre-contract costs, $26 million on embedded foreign currency derivatives and $31 million from the resolution of close-out matters. Segment profit in 2018 was adversely impacted by charges of $133 million for cost growth on a completed, downstream project and $40 million for cost growth on the aforementioned offshore project.
The changes in segment profit margin in 2020 and 2019 were primarily attributable to the same factors that affected revenue and segment profit. Segment profit margin in 2020 was also adversely impacted by a shift from higher margin work in 2019 to lower margin work in 2020 in certain geographies.
No significant awards were booked in 2020 due to the impact of COVID-19 and declining oil prices on our customers' capital spend. New awards in 2019 included a downstream project in the United Kingdom as well as chemicals projects in China, India and on the U.S. gulf coast. New awards in 2018 included an LNG export facility in Canada as well as an engineering and procurement contract for a refinery in Texas.
The decline in backlog during 2020 resulted from the decline in new award activity and the de-recognition of a suspended downstream project. The decrease in backlog during 2019 resulted primarily from new award activity being outpaced by work performed as well as the removal of certain contracts associated with our joint venture in Mexico that were suspended during 2019.
We expect our Energy & Chemicals segment to benefit from opportunities in the chemicals and non-traditional oil and gas markets.
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Mining & Industrial
Revenue decreased in 2020 compared to 2019 primarily due to a six month suspension during 2020 of a large mining project in South America due to COVID-19 and a decline in the volume of execution activities for a large life sciences project and two mining projects completed or nearing completion. These revenue declines were partially offset by increased execution activities on two advanced technologies projects as well as a mining project and a metals project, both in North America. Revenue increased in 2019 compared to 2018 primarily due to increased execution activities for several large mining projects as well as ramping up construction activity on the two advanced technologies projects.
Segment profit declined in 2020 compared to 2019 primarily due to a gain of $31 million recognized in 2019 resulting from a favorable resolution of a longstanding customer dispute on a mining project. Segment profit in 2020 was also adversely impacted by the decline in activity for the life sciences project and mining projects nearing completion as well as the mining project in South America that was impacted by COVID-19. The decrease in segment profit in 2020 was partially offset by a reduction in overhead expenses.Segment profit in 2019 increased compared to 2018 due to the increased volume of execution activities for the large mining projects and the two advanced technologies projects that drove the increase in revenue as well as the favorable resolution of the customer dispute. The decline in segment profit margin in 2020 and the increase in segment profit margin in 2019 was primarily the result of the favorable resolution of the customer dispute in 2019.
New awards in 2020 included a significant North American steel project as well as several front-end studies that we believe positions the segment well for follow-on EPC awards. New awards in 2019 included an advanced manufacturing project in the Netherlands. New awards in 2018 included a copper project in Peru, an iron ore replacement mine in Australia and a mine expansion project in Peru. The decrease in backlog during 2020 and 2019 primarily resulted from work performed outpacing new award activity.
We expect our mining business line to benefit from the growing global demand for copper and our advanced technologies and life sciences business line to benefit from the increasing demand for data storage facilities and biological facilities.
Infrastructure & Power
Revenue in 2020 increased compared to 2019 primarily driven by an increase in execution activities for several infrastructure projects, including a year-over-year increase on a rail project which was canceled in the third quarter of 2020. The increase in revenue during 2020 was partially offset by a decrease in execution activities for several infrastructure projects nearing completion. Revenue in 2019 decreased compared to 2018 primarily due to the substantial completion of the three large power projects during 2019. This decline was partially offset by increased project execution activities on several infrastructure projects. Revenue also reflects the adverse impact of various forecast revisions discussed below.
Segment profit in 2020 significantly improved compared to 2019 primarily due to forecast revisions on several power and infrastructure projects recognized in 2019 (discussed below). A positive settlement on a canceled rail project in 2020 was offset by charges for cost growth in the infrastructure legacy portfolio. Segment profit in 2019 significantly decreased compared to 2018 due to charges of $135 million for the settlement of client disputes and cost growth on certain close-out matters for the three power projects discussed above and $133 million resulting from late engineering changes, schedule-driven cost growth and negotiations with clients and subcontractors on pending change orders for several infrastructure projects. Segment profit in 2018 included $188 million in charges on one of the aforementioned power projects as a result of cost growth and a $125 million gain associated with the sale of a joint venture interest in the United Kingdom. The changes in segment profit margin in 2020 and 2019 were primarily attributable to the same factors impacting segment profit in those years. Lower margin contributions from certain infrastructure projects for which charges were recognized during 2020 and 2019 may continue to adversely impact near term segment profit margin. We expect approximately 35% of the segment's revenue in 2021 will be generated from zero margin projects as of December 31, 2020.
New awards in 2020 included a highway project in Texas.New awards in 2019 included a road project in Texas and a rail project in Chicago. New awards in 2018 included an international bridge project and the LAX Automated People Mover project.
The decrease in backlog during 2020 was primarily due to a decline in new award activity in part driven by more selectivity in pursuing projects as well as delayed procurements. The decrease in backlog during 2019 was primarily due to work performed and project cancellations outpacing new award activity. Backlog included $1.5 billion for projects in a loss position as of December 31, 2020.
We believe our infrastructure business is well positioned for select opportunities in the U.S. due to urbanization and an aging infrastructure system. These opportunities may be enhanced with the introduction of a federal infrastructure spending bill.
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Government
Revenue in 2020 decreased compared to 2019 primarily due to the completion of a nuclear decommissioning project in 2019 as well a decline in work performed for FEMA. The decrease in 2020 revenue was further driven by the recognition of service fee revenue in 2019 upon the favorable settlement of project claims on two cancelled nuclear power projects in the U.S. The decline in revenue in 2020 was partially offset by increased project execution activities at the Strategic Petroleum Reserve as well as our DOE sites. Revenue in 2019 decreased compared to 2018 substantially driven by the completion of a power restoration project in Puerto Rico in 2018 as well as a decrease in project execution activities for a logistics assistance program in Afghanistan, partially offset by an increase in execution activities at the Savannah River DOE site and the favorable settlement of the two nuclear power plant projects in 2019.
The decrease in segment profit in 2020 was substantially driven by the favorable settlement of the two nuclear power plant projects in 2019 as well as the completion of the nuclear decommissioning project in 2019 and the decline in FEMA work in 2020. Segment profit in 2020 was also adversely impacted by COVID-19, particularly as it relates to estimated fee recoveries on certain projects. The increase in segment profit in 2019 was due to the favorable settlement of the two nuclear power plant projects. The changes in segment profit margin in 2020 and 2019 were primarily attributable to the same factors that affected revenue and segment profit.
New awards in 2020, 2019 and 2018 included one-year extensions of the logistics assistance contract in Afghanistan and the Savannah River environmental management contract. New awards in 2018 also included a five-year extension of the Strategic Petroleum Reserve contract and a thirty-month extension at the Portsmouth Gaseous Diffusion Plant site.
The decline in backlog during 2020 and 2019 resulted from new award activity being outpaced by work performed. Backlog included $1.0 billion and $1.9 billion of unfunded government contracts as of December 31, 2020 and 2019, respectively.
Diversified Services
As discussed elsewhere, most of the operating results of our AMECO equipment business are included in Disc Ops. The retained portion of the AMECO operations have been or are in the process of being liquidated but do not meet the qualifications of Disc Ops. These retained operations remain in the Diversified Services segment.
Revenue in 2020 decreased compared to 2019 primarily due to the impact of COVID-19 and declining oil prices resulting in lower volumes in the Stork business and the staffing business as turnaround work is delayed and maintenance scopes reduced. Revenue declines in 2020 were further driven by reduced volume from the winding down of our AMECO operations in Mexico. Revenue in 2019 decreased compared to 2018 primarily due to lower volumes in the Stork business in Europe, the cancellation of a large operations and maintenance project in North America in 2018 and scope reductions on a maintenance project in Australia. The decline in 2019 revenue was further driven by scope reductions on a large power services project in the U.S. and lower volumes at the AMECO equipment business in Mexico. The revenue declines in 2019 were partially offset by higher contributions from the staffing business in North America and Europe.
Segment profit in 2020 remained flat compared to 2019. The lower volumes in the Stork business and the staffing business were offset by a reduction in expenses related to close out activities at our AMECO operations in Mexico as well as a reduction in overhead costs. Segment profit in 2019 decreased compared to 2018 primarily driven by the above mentioned reduced volumes in the operations and maintenance business, including higher margin specialty services, and the closure of the AMECO equipment business in Mexico. The decline in segment profit in 2019 was further driven by charges related to negotiations with clients and joint venture partners. The declines in segment profit margin in 2020 and 2019 were primarily due to the same factors affecting segment profit.
The decrease in backlog during 2020 was primarily due to the postponement of new maintenance work due to COVID-19 and the decline in oil prices. The increase in backlog during 2019 was primarily due to a large award for the power services business. Our equipment and staffing businesses do not report backlog or new awards.
Other
Other includes the operations of NuScale, as well as two lump-sum projects including a plant for which we serve as a subcontractor to a commercial client (the "Radford" project) and a weapons storage and maintenance facility (the "Warren" project). The Radford and Warren projects continue to project losses as of December 31, 2020.
Revenue in 2020 increased compared to 2019 due to increased execution activities for both the Radford and Warren projects.
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Segment loss in 2020 improved due to the recognition of significant charges on the Radford and Warren projects in 2019. Forecast revisions in 2019 resulted in charges of $59 million on the Warren project and $83 million on the Radford project for various engineering and cost growth associated with the facilities. Segment loss in 2018 of $56 million was driven by forecast revisions on the Radford project. Our forecast for both projects is based upon our assessment of the probable cost to finish the projects as well as our assessment of the recovery of unapproved change orders. The Radford project is substantially complete with systems turnover to the client expected in the first quarter of 2021.
NuScale expenses, net of qualified reimbursable expenses, included in the determination of segment loss, were $84 million, $66 million and $74 million during 2020, 2019 and 2018, respectively. The increase in NuScale costs during 2020 was due to an increase in research and development activities as NuScale received final design certification by the U.S. Nuclear Regulatory Commission in August of 2020. Capital contributions by NuScale's NCI holders of $9 million, $49 million and $2 million during 2020, 2019 and 2018, respectively, reduced the need for additional funding from Fluor.
Corporate and Other Matters
YEAR ENDED DECEMBER 31
Corporate G&A
Foreign currency (gains) losses 46.8 26.5 (33.4)
Legal and accounting fees associated with the 2020 internal review 42.0 — —
The increase in compensation expense in 2020 was primarily due to higher stock price driven compensation, as our stock price increased from the date of grant to the end of the year. The decrease in compensation expense in 2019 was primarily due to lower stock price and performance driven compensation. During 2020 and 2019, most major foreign currencies strengthened against the U.S. dollar resulting in foreign currency exchange losses. In 2018, most major foreign currencies weakened against the U.S. dollar resulting in foreign currency exchange gains. The decrease in other expense in 2020 was driven by the realization of our restructuring efforts and lower travel costs due to COVID-19.
The increase in net interest expense during 2020 was primarily attributable to a decrease in interest income driven by lower interest rates in 2020. The decrease in net interest expense during 2019 was primarily attributable to an increase in interest income from time deposits in 2019 as well as a payment made in 2018 for a "make-whole" premium associated with the redemption of the 2021 Notes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are described in the notes to our financial statements. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available through the date of the issuance of the financial statements and, accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of our financial statements apply to the following critical accounting policies:
Revenue Recognition for Long-Term Contracts. We recognize our engineering and construction contract revenue over time as we provide services to satisfy our performance obligations. We generally use the cost-to-cost percentage-of-completion measure of progress as it best depicts how control transfers to our clients. The cost-to-cost approach measures progress towards completion based on the ratio of contract cost incurred to date compared to total estimated contract cost. Use of the cost-to-cost measure of progress requires us to prepare estimates of total expected revenue and cost to complete our projects.
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Due to the nature of our industry, there is significant complexity in our estimation of total expected revenue and cost, for which we must make significant judgments. Our contracts with our customers may contain award fees, incentive fees, liquidated damages or other provisions that can either increase or decrease the contract price to arrive at estimated revenue. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable we will realize that amount. Our estimates of variable consideration and our determination of its inclusion in project revenue for accounting purposes are based on an assessment of our anticipated performance and other information that may be available to us.
At a project level, we have specific practices and procedures to review our estimate of total revenue and cost. Each project team reviews the progress and execution of our performance obligations, which impact the project’s accounting outcome. As part of this process, the project team reviews information such as any outstanding key contract matters, progress towards completion and the related program schedule and identified risks and opportunities. The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our project estimates, which can change from period to period for factors such as:
•Complexity in original design;
•Extent of changes from original design;
•Different site conditions than assumed in our bid;
•The productivity, availability and skill level of labor;
•Weather conditions when executing a project;
•The technical maturity of the technologies involved;
•Length of time to complete the project;
•Availability and cost of equipment and materials;
•Subcontractor and joint venture partner performance;
•Expected costs of warranties; and
•Our ability to recover for additional contract costs.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate adversely differs from the previous estimate. If we estimate that a project will have costs in excess of revenue, we recognize the total loss in the period it is identified.
Variable Consideration. The nature of our contracts gives rise to several types of variable consideration, including claims, unpriced change orders, award and incentive fees, liquidated damages and penalties. We consider variable consideration in the development of our project forecasts so that our forecasted revenue reflects the amount of consideration we expect to be probable of recovering without a future significant reversal. We estimate the amount of revenue attributable to variable consideration using the expected value method (i.e., the sum of probability-weighted amounts) or the most likely amount method, whichever offers better prediction. Significant judgments are required in developing estimates for variable consideration.
Fair Value Measurements. We are often required to use fair value measurement techniques with inputs that require the use of estimates and involve significant judgment. These circumstances include:
•Goodwill impairment testing of reporting units when quantitative analysis is deemed necessary
•Impairment testing of intangible assets when impairment indicators are present
•Impairment testing of investments as part of other than temporary impairment assessments when impairment indicators are present
•Fair value assessments of businesses held for sale that are reported at fair value less cost to sell
•Purchase price allocations for acquired businesses
When performing quantitative fair value or impairment evaluations, we estimate the fair value of our assets by considering the results of either or both income-based and market-based valuation approaches. Under the income approach, we prepare a discounted cash flow valuation model using recent forecasts and compare the estimated fair value of each asset to its carrying value. Cash flow forecasts are discounted using the appropriate weighted-average cost of capital at the date of evaluation. The weighted-average cost of capital is comprised of the cost of equity and the cost of debt with a weighting for each that reflects our current capital structure. Preparation of long-term forecasts involve significant judgments involving consideration of our backlog, expected future awards, customer attrition, working capital assumptions, and general market trends and conditions. Significant changes in these forecasts or any valuation assumptions, such as the discount rate selected, could affect the estimated fair value of our assets and could result in impairment expenses. Under the market approach, we
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consider market information such as multiples of comparable publicly traded companies and/or completed sales transactions to develop or validate our fair value conclusions, when appropriate and available.
Due to the impact of COVID-19 and the decline in oil prices in 2020, we performed interim impairment testing of our goodwill, intangibles and certain other investments and recognized impairment expenses during the first quarter of 2020 of $169 million, $27 million and $86 million, respectively. All other factors being equal, a one hundred basis point change in the discount rates used in these valuations would change the fair value of these assets by $47 million, $2 million and $3 million, respectively.
During the third quarter of 2019, we performed quantitative testing of our goodwill, intangibles and other investments. The majority of our goodwill resides in our Diversified Services reporting unit. Based on the testing performed, the fair value of the Diversified Services reporting unit exceeded its carrying value, including goodwill, by 20%. All other factors being equal, a one hundred basis point increase in the discount rate used in the valuation would have resulted in its fair value exceeding its carrying value by 7%. During the third quarter of 2019, we recognized impairment charges of $257 million related to certain investments and $34 million related to customer relationship intangible assets. All other factors being equal, a one hundred basis point change in the discount rates used in these valuations would have affected these impairments by $20 million and $4 million, respectively.
Restructuring Accruals. We recognize and accrue restructuring related termination benefits when the recognition criteria under GAAP have been met, depending on the nature of the termination benefit. Recognition of termination benefits requires the use of estimates in determining the expected termination benefits payable, when they are probable of being realized and can be reasonably estimated. Our estimates consider the number of employees that we expect will be eligible to receive the benefit and the amount of benefit potentially payable to each employee based on either the terms of the plan or statutory entitlement.
Recent Accounting Pronouncements
Item is described more fully in the Notes to Financial Statements.
Litigation and Matters in Dispute Resolution
Item is described more fully in the Notes to Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Our liquidity is provided by available cash and cash equivalents and marketable securities, cash generated from operations, capacity under our credit facility and, when necessary, access to the capital markets. We have both committed and uncommitted lines of credit available for revolving loans and letters of credit. We believe that for at least the next 12 months, cash generated from operations, along with our unused credit capacity and cash position, is sufficient to support operating requirements. However, we regularly review our sources and uses of liquidity and may pursue opportunities to increase our liquidity position.
In February 2021, we entered into an amended and restated $1.65 billion credit facility which matures in February 2023 and replaces the now terminated $1.7 billion and $1.8 billion Revolving Loan and Letter of Credit Facilities. The amended credit facility contains customary financial and restrictive covenants, including a debt-to-capitalization ratio that cannot exceed 0.65 to 1.00, a limitation on the aggregate amount of debt of the greater of $750 million or €750 million for our subsidiaries, and a minimum liquidity threshold, as defined in the amended credit facility, of $1.5 billion which may be reduced to $1.25 billion upon the repayment of debt. If the amended credit facility had been in place as of December 31, 2020, our financial covenants would have limited our further borrowings to approximately $934 million. If there are future losses, the amount of available credit capacity under our committed facility may be further reduced.
As of December 31, 2020, letters of credit totaling $418 million were outstanding under our predecessor lines of credit. There were no borrowings outstanding under these facilities as of December 31, 2020. These credit facilities also contained customary financial and restrictive covenants, including a debt-to-capitalization ratio that could not exceed 0.6 to 1.0.
Cash and cash equivalents combined with marketable securities were $2.2 billion as of December 31, 2020 and $2.0 billion as of December 31, 2019. Cash and cash equivalents are held in numerous accounts throughout the world to fund our global project execution activities. Non-U.S. cash and cash equivalents amounted to $984 million and $944 million as of December 31, 2020 and 2019, respectively. Non-U.S. cash and cash equivalents exclude deposits of U.S. legal entities that are either swept into overnight, offshore accounts or invested in offshore, short-term time deposits, to which there is unrestricted access.
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In evaluating our liquidity needs, we consider cash and cash equivalents held by our consolidated variable interest entities (joint ventures and partnerships). These amounts (which totaled $655 million and $393 million as of December 31, 2020 and 2019, respectively) were not necessarily readily available for general purposes. We also consider the extent to which client advances (which totaled $125 million and $69 million as of December 31, 2020 and 2019, respectively) are likely to be sustained or consumed over the near term for project execution activities and the cash flow requirements of our various foreign operations. In some cases, it may not be financially efficient to move cash and cash equivalents between countries due to statutory dividend limitations and/or adverse tax consequences. We did not consider any cash to be permanently reinvested outside the U.S. as of December 31, 2020 and 2019, other than unremitted earnings required to meet our working capital and long-term investment needs in non-U.S. foreign jurisdictions where we operate.
Year Ended December 31,
INVESTING CASH FLOW
Proceeds from sales of businesses and investments 48,897 — 124,942
FINANCING CASH FLOW
Repurchase of common stock — — (50,022)
Proceeds from issuance of Senior Notes — — 598,722
Cash paid during the year for:
Operating Activities
Cash flows from operating activities result primarily from our EPC activities and are affected by changes in working capital associated with such activities. Working capital levels vary from period to period and are primarily affected by our volume of work and the billing schedules on our projects. These levels are also impacted by the stage of completion and commercial terms of engineering and construction projects, as well as our execution of our projects compared to their budget. Working capital requirements also vary by project and the payments terms agreed to with our clients, vendors and subcontractors. Most contracts require payments as the projects progress. Additionally, certain projects receive advance payments from clients. A typical trend for our projects is to have higher cash balances during the initial phases of execution due to deposits paid to us which then diminish toward the end of the construction phase. As a result, our cash position is reduced as customer advances are utilized, unless they are replaced by advances on other projects. We maintain cash reserves and borrowing facilities to provide additional working capital in the event that a project’s net operating cash outflows exceed its available cash balances.
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During 2020, consolidated working capital decreased. Specific factors related to the change in working capital include:
•Decreases in accounts receivable which resulted from normal billing and collections for several projects in the Infrastructure & Power, Government and Diversified Services segments.
•Decreases in contract assets which resulted from normal project execution activities for several projects in the Energy & Chemicals, Mining & Industrial, and Diversified Services segments.
During 2019, working capital significantly decreased. Specific factors related to the change in working capital include:
•Decreases in accounts receivable which resulted primarily from normal billing and collections for several projects in the Mining & Industrial segment as well as the LOGCAP IV program in Afghanistan.
•Decreases in contract assets which resulted primarily from normal project execution activities for several projects in the Energy & Chemicals, Infrastructure & Power and Government segments.
Excluding the non-cash impact of adopting ASC 606, working capital increased during 2018. Specific factors related to the change in working capital include:
•Increases in contract assets which resulted primarily from normal project execution activities on a large mining project and several infrastructure projects, partially offset by decreases in contract assets on several Energy & Chemicals projects.
•A decrease in contract liabilities in the Energy & Chemicals segment, which resulted primarily from normal project execution activities on several large projects.
•An increase in accounts payable in the Mining & Industrial segment, which resulted from normal invoicing activities on a large mining project.
•A decrease in other current assets, driven primarily by the receipt of income tax refunds in 2018.
The decrease in operating cash flow in 2020 and the increase in operating cash flow in 2019 resulted primarily from changes in working capital balances.
During the fourth quarter of 2020, we entered into a settlement agreement with a client in connection with a dispute over client-imposed delays and cost overruns on a cancelled rail project in Maryland. We received an initial settlement payment of $116 million in December 2020 and we are contractually owed an additional $150 million to be paid no later than December 2021.
During 2020, we paid approximately $40 million in legal and accounting fees associated with the internal review that was completed in December 2020.
We contributed $130 million, $115 million and $150 million into our DC plans during 2020, 2019 and 2018, respectively, and $25 million, $15 million and $45 million into our DB plans during 2020, 2019 and 2018, respectively. We expect to contribute up to $12 million to our DB plans in 2021, which is expected to be in excess of the minimum funding required.
All periods included the operations of NuScale, which are primarily for research and development activities associated with the licensing and commercialization of small modular nuclear reactor technology. NuScale expenses included in the determination of segment profit were $84 million, $66 million and $74 million during 2020, 2019 and 2018, respectively. NuScale expenses for 2020, 2019 and 2018 were reported net of qualified reimbursable expenses of $71 million, $56 million and $62 million, respectively. Capital contributions by NuScale's NCI holders of $9 million, $49 million and $2 million during 2020, 2019 and 2018, respectively, reduced the need for additional funding from Fluor.
Investing Activities
We hold cash in bank deposits and marketable securities which are governed by our investment policy. This policy focuses on, in order of priority, the preservation of capital, maintenance of liquidity and maximization of yield. These investments may include money market funds, bank deposits placed with highly-rated financial institutions, repurchase agreements that are fully collateralized by U.S. Government-related securities, high-grade commercial paper and high quality short-term and medium-term fixed income securities.
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Capital expenditures are primarily related to construction equipment associated with equipment operations now included in Disc Ops, as well as expenditures for facilities and investments in information technology. Proceeds from the disposal of property, plant and equipment are primarily related to the disposal of construction equipment associated with the equipment business in Disc Ops.
During 2020, we sold substantially all of the assets of our AMECO equipment business in Jamaica as well as 100% of our interest in an equipment rental business in Europe. The operations of the AMECO business in Jamaica were included in Disc Ops through the date of sale. Also in 2020, we sold our interests in two infrastructure joint ventures in the Netherlands that are currently in the operations and maintenance phase of the contract and one infrastructure joint venture in the U.S. In 2018, we sold our interest in a joint venture in the United Kingdom.
Investments in unconsolidated partnerships and joint ventures in 2020 and 2019 included capital contributions to two infrastructure joint ventures in the United States. Investments in 2018 included capital contributions to an infrastructure joint venture in the United States as well as investments in COOEC Fluor. We completed our final funding commitment to COOEC Fluor of $26 million during 2021.
Financing Activities
We have a common stock repurchase program, authorized by the Board of Directors, to purchase shares in the open market or privately negotiated transactions at our discretion. In 2018, we repurchased 1,097,126 shares of common stock under our current and previously authorized stock repurchase programs. As of December 31, 2020, 10,513,093 shares could still be purchased under the existing stock repurchase program.
Quarterly cash dividends were typically paid during the month following the quarter in which they were declared.
Therefore, dividends declared in the fourth quarter of 2019 were paid in the first quarter of 2020. Quarterly cash dividends of
$0.21 per share were declared in 2018 and in the first, second and third quarters of 2019. Quarterly cash dividends
of $0.10 per share were declared in the fourth quarter of 2019. We suspended our dividend during April 2020. The
payment and level of future cash dividends is subject to the discretion of our Board of Directors.
In August 2018, we issued $600 million of 4.250% Senior Notes (the “2028 Notes”) due September 15, 2028 and received proceeds of $595 million, net of underwriting discounts. Interest on the 2028 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on March 15, 2019.
In September 2018, we used a portion of the proceeds from the 2028 Notes to fully redeem our $500 million 3.375%
Senior Notes (the “2021 Notes”) due September 15, 2021. The redemption price of $503 million was equal to 100 percent of
the principal amount of the 2011 Notes plus a “make-whole” premium of $3 million.
Other borrowings represent short-term bank loans and other financing arrangements associated with Stork. During the second and third quarters of 2018, we issued commercial paper to meet our short-term liquidity needs. All of the outstanding commercial paper was repaid in October 2018.
Distributions paid to holders of NCI represent cash outflows to partners of consolidated partnerships or joint ventures created primarily for the execution of single contracts or projects. Distributions in 2020 and 2019 primarily related to a mining joint venture project in Chile. Distributions in 2018 primarily related to transportation joint venture projects in the United States. Capital contributions by NCI in 2020 related to three infrastructure joint ventures in the United States. Capital contributions by NCI in 2019 primarily related to initial investments from new partners in NuScale.
Effect of Exchange Rate Changes on Cash
During 2019, most major foreign currencies strengthened against the U.S. dollar resulting in unrealized translation gains of $101 million of which $10 million related to cash held by foreign subsidiaries. During 2018, most major foreign currencies weakened against the U.S. dollar resulting in unrealized translation losses of $117 million of which $62 million related to cash held by foreign subsidiaries. The cash held in foreign currencies will primarily be used for project-related expenditures in those currencies, and therefore our exposure to exchange gains and losses is generally mitigated.
Off-Balance Sheet Arrangements
Letters of Credit
As of December 31, 2020, letters of credit totaling $418 million were outstanding under committed lines of credit and letters of credit totaling $862 million were outstanding under uncommitted lines of credit. Letters of credit are provided in the ordinary course of business primarily to indemnify our clients if we fail to perform our obligations under our contracts. Surety bonds may be used as an alternative to letters of credit.
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Guarantees
In the ordinary course of business, we enter into various agreements providing performance assurances and guarantees to our clients. These agreements are entered into primarily to support project execution commitments. The performance guarantees have various expiration dates ranging from mechanical completion of the project to a period extending beyond contract completion. The maximum potential amount of future payments that we could be required to make under outstanding performance guarantees, which represents the remaining cost of work to be performed, was estimated to be $14 billion as of December 31, 2020. Amounts that may be required to be paid in excess of estimated cost to complete contracts in progress are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed. For lump-sum contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors for claims. The performance guarantee obligation was not material as of December 31, 2020 and 2019.
Financial guarantees, made in the ordinary course of business in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate us to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation.
Inflation
Although inflation and cost trends affect our results, we mitigate these trends by seeking to fix our cost at or soon after the time of award on lump-sum or fixed-price contracts or to recover cost increases in cost reimbursable contracts.
Variable Interest Entities
We frequently form joint ventures or partnerships with others primarily for the execution of single contracts or projects. We assess our joint ventures and partnerships at inception to determine if any meet the qualifications of a VIE as defined in GAAP. If a joint venture or partnership is a VIE and we are the primary beneficiary, the joint venture or partnership is consolidated and our partners' interests are recognized as NCI. Additional discussion of our VIEs may be found in the Notes to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Cash and marketable securities are deposited with major banks throughout the world. Such deposits are placed with high quality institutions and the amounts invested in any single institution are limited to the extent possible in order to minimize concentration of counterparty credit risk. Marketable securities may consist of time deposits, registered money market funds, U.S. agency securities, U.S. Treasury securities, commercial paper, non-U.S. government securities and corporate debt securities. We have not incurred any credit risk losses related to deposits in cash or investments in marketable securities.
Certain of our contracts are subject to foreign currency risk. We limit exposure to foreign currency fluctuations in most of our engineering and construction contracts through provisions that require client payments in currencies corresponding to the currency in which cost is incurred. As a result, we generally do not need to hedge foreign currency cash flows for contract work performed. However, in cases where revenue and expenses are not denominated in the same currency, we may hedge our exposure, if material and if an efficient market exists, as discussed below.
We utilize derivative instruments to mitigate certain financial exposures, including currency and oil price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility. As of December 31, 2020, we had total gross notional amounts of $977 million of foreign currency contracts (primarily related to the Canadian Dollar, Chinese Yuan, British Pound, Euro, Indian Rupee and Philippine Peso) and $28 million of commodity contracts. The foreign currency and commodity contracts are of varying duration, none of which extend beyond December 2024. Our historical gains and losses associated with foreign currency contracts have typically been immaterial, and have largely mitigated the exposures being hedged. We do not enter into derivative transactions for speculative purposes.
Our results reported by foreign subsidiaries with non-U.S. dollar functional currencies are also affected by foreign currency volatility. When the U.S. dollar appreciates against the non-U.S. dollar functional currencies of these subsidiaries, our reported revenue, cost and earnings, after translation into U.S. dollars, are lower than what they would have been had the U.S. dollar depreciated against the same foreign currencies or if there had been no change in the exchange rates.
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Our long-term debt obligations typically carry a fixed-rate coupon, and therefore, our exposure to interest rate risk is not material.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is submitted as a separate section of this Form 10-K as described in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As defined in Rule 13a-15 and 15d-15 of the Exchange Act, our management, with the participation of our CEO and CFO, is responsible for establishing and maintaining disclosure controls and procedures. These controls and procedures should be designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO to allow timely decisions regarding required disclosure.
Based on their evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate ICFR that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Our management, including our CEO and CFO, conducted an assessment of the effectiveness of our ICFR as of December 31, 2020 based upon the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) and concluded that our ICFR was effective.
Ernst & Young LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of our ICFR. Their report follows this management report.
Changes in Internal Control over Financial Reporting
As disclosed in Part II, Item 9A. Controls and Procedures in our 2019 10-K, we concluded that our disclosure controls and procedures were not effective as of December 31, 2019 due to the existence of material weakness in our ICFR. Material weakness describes a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
During 2020, management implemented several remediations to address the material weakness by:
•Taking personnel actions, including separations, for individuals involved in projects associated with the material weaknesses
•Establishing additional monitoring procedures to help ensure that our policies and procedures are consistently followed at the project level, including enhanced requirements for business line approval and supporting documentation
•Reinforcing existing policies, including those policies that are critical to the generation of accounting information, to provide further assurance that the financial statements are subject to additional project-level controls; and
•Conducting expanded training on ethical behavior and internal certification processes.
Except for the changes made in connection with our implementation of the remediation efforts discussed above, there have been no changes in our ICFR during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our ICFR.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fluor Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Fluor Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Fluor Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Fluor Corporation as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
Fluor Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Fluor Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Fluor Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 26, 2021
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Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors, Executive Officers, Promoters and Control Persons
The information required by Paragraph (a), and Paragraphs (c) through (g) of Item 401 of Regulation S-K (except for information required by Paragraphs (d) — (f) of that Item to the extent the required information pertains to our executive officers) and Item 405 of Regulation S-K will be set forth in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year (our "Proxy Statement") and is incorporated herein by reference. The information required by Paragraph (b) of Item 401 of Regulation S-K, as well as the information required by Paragraphs (d) — (f) of that Item to the extent the required information pertains to our executive officers, is set forth herein at Part I, Item 1 of this 2020 10-K under the heading "Information about our Executive Officers."
Code of Ethics
We have long maintained and enforced a Code of Business Conduct and Ethics that applies to our CEO, CFO and CAO. A copy of our Code of Business Conduct and Ethics, as amended, has been posted on the "Sustainability" — "Ethics and Compliance" portion of our website, www.fluor.com.
We have disclosed and intend to continue to disclose any changes or amendments to our code of ethics or waivers from our code of ethics applicable to our CEO, CFO and CAO by posting such changes or waivers to our website.
Corporate Governance
We have adopted corporate governance guidelines, which are available on our website at www.fluor.com under the "Sustainability" portion of our website under the heading "Corporate Governance Documents" filed under "Governance." Information regarding the Audit Committee is hereby incorporated by reference from the information that will be contained in our Proxy Statement.
Item 11. Executive Compensation
Information required by this item will be included in our Proxy Statement, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 with respect to the shares of common stock that may be issued under our equity compensation plans:
Equity compensation plans not approved by stockholders(2) 427,420 $16.55(3) —
_______________________________________________________________________________
(1)Consists of (a) the Amended and Restated 2008 Executive Performance Incentive Plan, under which 3,631,290 shares are issuable upon exercise of outstanding options, and under which no shares remain for future issuance; (b) the 2017 Performance Incentive Plan, under which 1,845,282 shares are issuable upon exercise of outstanding options, 2,096,516 shares are issuable upon vesting of outstanding restricted stock units, 1,554,108 shares are issuable if specified performance target awards are met under outstanding performance-based award units, and under which no shares remain available for issuance; (c) the 2020 Performance Incentive Plan, under which 9,179,797 remain available for issuance; (d) 17,212, 23,177 and 8,708 vested restricted stock units under the 2008 Executive Performance Plan, 2017 Performance Incentive Plan and 2020 Performance Incentive Plan, respectively, that were deferred by non-associate directors participating in the 409A Director Deferred Compensation Program that are distributable in the form of shares;
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(e) 108,734 vested restricted stock units granted to non-associate directors under the 2017 Performance Incentive Plan that are subject to a post-vest holding period and for which shares have not been issued; and (f) 149,422 vested restricted stock units and performance-based award units deferred by executive officers under the 2008 Executive Performance Incentive Plan.
(2)Consists of inducement awards made to Mr. David E. Constable in connection with his appointment as CEO.
(3)Weighted-average exercise price of outstanding options only.
The additional information required by this item will be included in our Proxy Statement, which information is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included in our Proxy Statement, which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by this item will be included in our Proxy Statement, which information is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as part of this 2020 10-K:
1.Financial Statements:
Our consolidated financial statements at December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, together with the report of our independent registered public accounting firm on those consolidated financial statements are hereby filed as part of this 2020 10-K, beginning on page F-1.
2.Financial Statement Schedules:
No financial statement schedules are presented since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
3.Exhibits:
EXHIBIT INDEX
Exhibit Description
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Exhibit Description
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Exhibit Description
10.29 Summary of Fluor Corporation Non-Management Director Compensation.*
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Exhibit Description
21.1 Subsidiaries of the registrant.*
23.1 Consent of Independent Registered Public Accounting Firm.*
101.INS Inline XBRL Instance Document.*
101.SCH Inline XBRL Taxonomy Extension Schema Document.*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
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Exhibit Description
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.*
_______________________________________________________________________________
* Exhibit filed with this report.
** Management contract or compensatory plan or arrangement.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Operations for the years ended December 31, 2020, 2019 and 2018, (ii) the Consolidated Balance Sheet at December 31, 2020 and December 31, 2019, (iii) the Consolidated Statement of Cash Flows for the years ended December 31, 2020, 2019 and 2018 and (iv) the Consolidated Statement of Equity for the years ended December 31, 2020, 2019 and 2018.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this 2020 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
FLUOR CORPORATION
By: /s/ JOSEPH L. BRENNAN
Joseph L. Brennan,Chief Financial Officer
February 26, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this 2020 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature Title Date
Principal Executive Officer and Director:
/s/ DAVID E. CONSTABLE
David E. Constable Chief Executive Officer February 26, 2021
Principal Financial Officer:
/s/ JOSEPH L. BRENNAN
Joseph L. Brennan Chief Financial Officer February 26, 2021
Principal Accounting Officer:
/s/ JOHN C. REGAN
John C. Regan Chief Accounting Officer February 26, 2021
Other Directors:
/s/ ALAN L. BOECKMANN
Alan L. Boeckmann Executive Chairman February 26, 2021
/s/ ALAN M. BENNETT
Alan M. Bennett Director February 26, 2021
/s/ ROSEMARY T. BERKERY
Rosemary T. Berkery Director February 26, 2021
/s/ H. PAULETT EBERHART
H. Paulett Eberhart Director February 26, 2021
/s/ PETER J. FLUOR
Peter J. Fluor Director February 26, 2021
/s/ JAMES T. HACKETT
James T. Hackett Director February 26, 2021
/s/ THOMAS C. LEPPERT
Thomas C. Leppert Director February 26, 2021
/s/ TERI P. MCCLURE
Teri P. McClure Director February 26, 2021
/s/ ARMANDO J. OLIVERA
Armando J. Olivera Director February 26, 2021
/s/ MATTHEW K. ROSE
Matthew K. Rose Director February 26, 2021
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FLUOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statement of Operations F-5
Consolidated Statement of Comprehensive Income (Loss) F-6
Consolidated Balance Sheet F-7
Consolidated Statement of Cash Flows F-8
Consolidated Statement of Changes in Equity F-9
Notes to Consolidated Financial Statements F-10
F-1
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fluor Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fluor Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unmodified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2
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Estimation of the Fair Value of Goodwill and Intangibles
F-3
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Long-term revenue recognition on engineering and construction contracts
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 1973.
Dallas, Texas
February 26, 2021
F-4
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FLUOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
Other (income) and expenses
Impairment, restructuring and other exit costs 305,590 532,600 —
Basic earnings (loss) per share attributable to Fluor Corporation
Net earnings (loss) from Cont Ops $ (2.09) $ (10.89) $ 1.09
Net earnings (loss) from Disc Ops (1.01) 0.02 0.15
Diluted earnings (loss) per share attributable to Fluor Corporation
Net earnings (loss) from Cont Ops $ (2.09) $ (10.89) $ 1.08
Net earnings (loss) from Disc Ops (1.01) 0.02 0.15
The accompanying notes are an integral part of these financial statements.
F-5
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FLUOR CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
OCI, net of tax:
Ownership share of equity method investees' OCI (18,528) (11,784) 8,942
Unrealized gain (loss) on available-for-sale securities — — 709
Less: Comprehensive income (loss) attributable to NCI 69,138 (32,310) 57,145
The accompanying notes are an integral part of these financial statements.
F-6
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FLUOR CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
Current assets
Marketable securities ($66 related to VIEs in both periods) 23,345 7,262
Noncurrent assets
LIABILITIES AND EQUITY
Current liabilities
Current liabilities related to assets held for sale 45,304 82,322
Contingencies and commitments
Equity
Shareholders' equity
The accompanying notes are an integral part of these financial statements.
F-7
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FLUOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
OPERATING CASH FLOW
Adjustments to reconcile net earnings (loss) to operating cash flow:
Impairment expense - Disc Ops 145,700 — —
Write-off of cumulative translation loss — 83,665 —
INVESTING CASH FLOW
Return of capital from partnerships and joint ventures 529 24,065 22,284
FINANCING CASH FLOW
Repurchase of common stock — — (50,022)
Debt issuance costs — — (5,061)
Taxes paid on vested restricted stock (1,313) (3,572) (5,686)
The accompanying notes are an integral part of these financial statements.
F-8
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FLUOR CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Shares Amount
Capital contributions by NCI — — — — — — 5,128 5,128
Capital contributions by NCI — — — — — — 64,646 64,646
The accompanying notes are an integral part of these financial statements.
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Fluor Corporation (“we”, “us”, “our” or “the company”) is a holding company that owns the stock of a number of subsidiaries, as well as interests in joint ventures. Acting through these entities, we are one of the largest professional services firms providing engineering, procurement, construction, fabrication and modularization, operations, maintenance and asset integrity, as well as project management services, on a global basis. We provide services to our clients in a diverse set of industries worldwide including oil and gas, chemicals and petrochemicals, mining and metals, infrastructure, life sciences, advanced manufacturing and advanced technologies. We are also a service provider to the U.S. federal government and governments abroad; and, we perform operations, maintenance and asset integrity activities globally for major industrial clients.
We had the following six reportable segments as of December 31, 2020:
•Energy & Chemicals
•Mining & Industrial
•Infrastructure & Power
•Government
•Diversified Services
•Other
The Energy & Chemicals segment focuses on opportunities in the upstream, midstream, downstream, chemical, petrochemical, offshore and onshore oil and gas production, LNG and pipeline markets. This segment has long served a broad spectrum of industries offering a full range of design, engineering, procurement, construction, fabrication and project management services.
The Mining & Industrial segment provides design, engineering, procurement, construction and project management services to the mining and metals, life sciences, advanced manufacturing and advanced technologies sectors.
The Infrastructure & Power segment provides design, engineering, procurement, construction and project management services to the transportation and power sectors.
The Government segment provides engineering and construction services, logistics and life-support, contingency operations support, management, mission operations, environmental remediation and decommissioning to the U.S. government and governments abroad.
The Diversified Services segment provides a wide array of asset maintenance, asset integrity and staffing services around the world. Most of the operating results of our AMECO equipment business previously included in Diversified Services are now included in discontinued operations. Certain operations of AMECO, primarily in Mexico, are in the process of being liquidated and did not meet the qualifications of discontinued operations. These retained operations will remain in the Diversified Services segment until their liquidation.
Other includes the operations of NuScale, as well as two lump-sum projects including a plant for which we serve as a subcontractor to a commercial client (the "Radford" project) and a weapons storage and maintenance facility (the "Warren" project). The Radford project is substantially complete with systems turnover to the client expected in the first quarter of 2021.
In the first quarter of 2020, we decided to retain our government business, which had previously been included in Disc Ops. As a result, the government business is no longer reported as a discontinued operation for any period presented. Our plan to sell the AMECO equipment business remains unchanged and it remains reported as a discontinued operation. We expect to complete the sale of the AMECO equipment business within the first half of 2021. The assets and liabilities of the AMECO business are classified as held for sale for all periods presented.
In the first quarter of 2021, we announced a plan to sell Stork, which we expect will be reported as a discontinued operation beginning with the first quarter of 2021.
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of Fluor Corporation and its subsidiaries. All significant intercompany transactions of consolidated subsidiaries are eliminated. Certain amounts disclosed in 2019 and 2018 have been reclassified to conform to the 2020 presentation, which includes presenting the operations of the government business in Cont Ops. Management has evaluated all material events occurring subsequent to December 31, 2020 through the filing date of the 2020 10-K.
We frequently form joint ventures or partnerships with others primarily for the execution of single contracts or projects. If a joint venture or partnership is a VIE and we are the primary beneficiary, the joint venture or partnership is consolidated and our partners' interests are recognized as NCI. As is customary in our industry, for other construction partnerships and joint ventures, we generally recognize our proportionate share of revenue, cost and profit and use the one-line equity method for the investment. In other instances, the cost and equity methods of accounting are used, depending on our respective ownership interest and amount of influence on the entity, as well as other factors. At times, we also execute projects through collaborative arrangements for which we recognize our relative share of revenue and cost.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available through the date of the issuance of the financial statements. Therefore, actual results could differ from those estimates.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. For our international subsidiaries, the functional currency is typically the currency of the primary economic environment in which each subsidiary operates. Translation gains and losses are recorded in OCI. Gains and losses from remeasuring foreign currency transactions into the functional currency are included in earnings.
Revenue Recognition
Engineering and construction contracts. We recognize engineering and construction contract revenue over time as we provide services to satisfy our performance obligations. We generally use the cost-to-cost percentage-of-completion measure of progress as it best depicts how control transfers to our clients. The cost-to-cost approach measures progress towards completion based on the ratio of contract cost incurred to date compared to total estimated contract cost. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services on a single project. Cost of revenue includes an allocation of depreciation and amortization. Where applicable, customer-furnished materials, labor and equipment and subcontractor materials, labor and equipment, are included in revenue and cost of revenue when management believes that we are acting as a principal rather than as an agent (i.e., we integrate the materials, labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue and cost when the contract includes construction activity and we have visibility into the amount the customer is paying for the materials or there is a reasonable basis for estimating the amount. We recognize revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when the cost is incurred and control is transferred. Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
Service contracts. For the majority of our operations and maintenance contracts, revenue is recognized when services are performed and contractually billable. For all other service contracts, we recognize revenue over time using the cost-to-cost percentage-of-completion method. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that has not been billed to clients is recorded as contract assets. Amounts billed to clients in excess of revenue recognized on service contracts to date are recorded as contract liabilities. Customer payments on service contracts are typically due within 30 to 90 days of billing, depending on the contract.
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Variable consideration. The nature of our contracts gives rise to several types of variable consideration, including claims, unpriced change orders, award and incentive fees, liquidated damages and penalties. We consider variable consideration in the development of our project forecasts so that our forecasted revenue reflects the amount of consideration we expect to be probable of recovering without a significant reversal. We estimate the amount of revenue to be recognized on variable consideration using the expected value method (i.e., the sum of probability-weighted amounts) or the most likely amount method, whichever offers better prediction.
Warranties. We generally provide limited duration warranties for work performed under our contracts. Historically, warranty claims have not resulted in material costs incurred, and any estimated costs for warranties are included in the individual project cost estimates for purposes of accounting for long-term contracts.
Practical Expedients. If we have a right to consideration from a customer in an amount that corresponds directly with the value of our performance completed to date (a service contract in which we bill a fixed amount for each hour of service provided), we recognize revenue in the amount to which we have a right to invoice for services performed. We do not adjust the contract price for the effects of a significant financing component where, at contract inception, the period between service provision and customer payment will be one year or less. We exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by us from our customers (use taxes, value added taxes, some excise taxes).
RUPO. RUPO represents a measure of the value of work to be performed on contracts awarded and in progress. Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPO is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. RUPO differs from backlog discussed elsewhere in the 2020 10-K. Backlog includes the amount of revenue we expect to recognize under ongoing operations and maintenance contracts for the remainder of the current year renewal period plus up to three additional years if renewal is considered to be probable, while RUPO includes only the amount of revenue we expect to recognize under ongoing operations and maintenance contracts with definite terms and substantive termination provisions.
Project Estimates
Due to the nature of our industry, there is significant complexity in our estimation of total expected revenue and cost, for which we must make significant judgments. Our contracts with our customers may contain award fees, incentive fees, liquidated damages or other provisions that can either increase or decrease the contract price to arrive at estimated revenue. These variable amounts generally are earned upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable we will realize that amount. Our estimates of variable consideration and our determination of its inclusion in project revenue for accounting purposes are based on an assessment of our anticipated performance and other information that may be available to us.
At a project level, we have specific practices and procedures to review our estimate of total revenue and cost. Each project team reviews the progress and execution of our performance obligations, which impact the project’s accounting outcome. As part of this process, the project team reviews information such as any outstanding key contract matters, progress towards completion and the related program schedule and identified risks and opportunities. The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our project estimates, which can change from period to period for factors such as:
•Complexity in original design;
•Extent of changes from original design;
•Different site conditions than assumed in our bid;
•The productivity, availability and skill level of labor;
•Weather conditions when executing a project;
•The technical maturity of the technologies involved;
•Length of time to complete the project;
•Availability and cost of equipment and materials;
•Subcontractor and joint venture partner performance;
•Expected costs of warranties; and
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•Our ability to recover for additional contract costs.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate adversely differs from the previous estimate. If we estimate that a project will have costs in excess of revenue, we recognize the total loss in the period it is identified.
Contract Assets and Liabilities
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) and contract work in progress (typically for fixed-price contracts). Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are recognized as accounts receivable when they are billed under the terms of the contract. Advances that are payments on account of contract assets are deducted from contract assets. We anticipate that substantially all incurred cost associated with contract assets as of December 31, 2020 will be billed and collected within one year. Contract liabilities represent amounts billed to clients in excess of revenue recognized to date.
Segment Reporting
Management evaluates segment performance based on segment profit. We incur cost and expenses and hold certain assets at the corporate level which relate to our business as a whole. Certain of these amounts have been charged to our business segments by various methods, largely on the basis of usage. Total assets not allocated to segments and held in "Corporate and other" primarily include cash, marketable securities, income-tax related assets, pension assets, deferred compensation trust assets and corporate property, plant and equipment.
Segment profit is an earnings measure that we utilize to evaluate and manage our business performance. Segment profit is calculated as revenue less cost of revenue and earnings attributable to NCI.
Variable Interest Entities
We assess our partnerships and joint ventures at inception to determine if any meet the qualifications of a VIE. We consider a partnership or joint venture a VIE if it has any of the following characteristics:
(a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support,
(b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or
(c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
Upon the occurrence of certain events, we reassess our initial determination of whether the partnership or joint venture is a VIE. The majority of our partnerships and joint ventures qualify as VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional subordinated financial support.
We also perform a qualitative assessment of each identified VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both:
(a) the power to direct the economically significant activities of the entity and
(b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE.
We consider the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if we are the primary beneficiary. We also consider all parties that have direct or implicit variable interests when determining whether we
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are the primary beneficiary. Management's assessment of whether we are the primary beneficiary of a VIE is continuously performed.
Cash and Cash Equivalents
Cash and cash equivalents include securities with maturities of three months or less at the date of purchase.
Marketable Securities
Marketable securities consist of time deposits placed with investment grade banks with original maturities greater than three months, which are typically held-to-maturity because we have the intent and ability to hold them until maturity. Held-to-maturity securities are carried at amortized cost. Our investments in debt securities are classified as available-for-sale because they may be sold prior to their maturity date. Available-for-sale securities are carried at fair value. The cost of securities sold is determined by using the specific identification method. Marketable securities are assessed at least annually for other-than-temporary impairment.
Research and Development
We have a controlling interest in NuScale, a research and development operation associated with the licensing and commercialization of small modular nuclear reactor technology. Since May 2014, NuScale has been receiving reimbursement from the DOE for certain qualified expenditures under cost-sharing award agreements that require NuScale to use the DOE funds to cover first-of-a-kind engineering costs associated with small modular reactor design development and certification. Costs incurred by NuScale are expensed as incurred, net of qualifying DOE reimbursements, and reported in "Cost of revenue". The U.S. Nuclear Regulatory Commission approved NuScale's design certification application in August 2020. Aside from NuScale, we generally do not engage in significant research and development activities.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Leasehold improvements are amortized over the shorter of their economic lives or the lease terms. Depreciation is calculated using the straight-line method over the following ranges of estimated useful service lives, in years:
Estimated Useful Service Lives
Building and leasehold improvements 6 – 20
Machinery and equipment 2 – 10
Furniture and fixtures 2 – 10
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are subject to at least annual impairment tests during the fourth quarter. For impairment testing, goodwill is allocated to the applicable reporting units based on the current reporting structure. We compare the fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized. Intangible assets with indefinite lives are impaired if their carrying value exceeds their fair value. In-process research and development associated with our investment in NuScale is considered indefinite lived until the related technology is available for commercial use.
Interim impairment testing of goodwill and intangible assets is performed if indicators of potential impairment exist. Such indicators may include the results of operations of certain businesses and geographies and the performance of the company stock price.
Intangible assets with finite lives are amortized on a straight-line basis over their useful lives.
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in our financial statements or tax filings. We evaluate the realizability of our deferred tax assets and record a valuation allowance to reduce deferred tax assets to amounts that are more likely than not to be realized. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize such assets. Failure to achieve forecasted taxable income could affect the ultimate realization of deferred tax assets and could adversely impact our future effective tax rate.
Income tax positions are recognized when they meet a more-likely-than-not recognition threshold. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized upon such determination. We recognize potential interest and penalties related to unrecognized tax positions as a component of income tax expense.
Judgment is required in determining the provision for income taxes as we consider our worldwide taxable earnings and the impact of the continuing audit process conducted by various tax authorities. The final outcome of any audits could differ materially from amounts recognized by the company.
We account for the GILTI effects in the period that is subject to such tax.
Derivatives and Hedging
We attempt to limit foreign currency exposure in most of our contracts by denominating contract revenue in the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility, may subject us to earnings volatility. We may implement a hedging strategy utilizing derivatives instruments or hedging instruments to mitigate such risk. Our hedging instruments are designated as either fair value or cash flow hedges. We formally document our hedge relationships at inception, including identification of the hedging instruments and the hedged items, our risk management objectives and strategies for undertaking the hedge transaction, and the initial quantitative assessment of the hedging instrument's effectiveness in offsetting changes in the fair value of the hedged items. We subsequently assess hedge effectiveness qualitatively, unless the hedge relationship is no longer highly effective. All hedging instruments are recorded at fair value. For fair value hedges, the change in fair value is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the change in fair value is recorded as a component of AOCI and is reclassified into earnings when the hedged item settles. For derivatives that are not designated or do not qualify as hedging instruments, the change in the fair value of the derivative is offset against the change in the fair value of the underlying asset or liability through earnings. In certain limited circumstances, foreign currency payment provisions could be deemed embedded derivatives. If an embedded foreign currency derivative is identified, the derivative is bifurcated from the host contract and the change in fair value is recognized through earnings. We maintain master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, we report the fair value of derivatives on a gross basis.
Concentrations of Credit Risk
Accounts receivable and all contract work in progress are from clients in various industries and locations throughout the world. Most contracts require payments as the projects progress or, in certain cases, advance payments. We generally do not require collateral, but in most cases can place liens against the project assets or terminate the contract, if a material default occurs. We evaluate the counterparty credit risk as part of our project risk review process and in determining the appropriate level of reserves. We maintain reserves for potential credit losses and generally such losses have been minimal and within management's estimates.
Cash and marketable securities are deposited with major banks throughout the world. Such deposits are placed with high quality institutions and the amounts invested in any single institution are limited to the extent possible in order to minimize concentration of counterparty credit risk.
Our counterparties for derivatives are large financial institutions selected based on profitability, strength of balance sheet, credit ratings and capacity for timely payment of financial commitments. There are no significant concentrations of credit risk with any individual counterparty related to our derivative contracts.
We monitor the credit quality of our counterparties and have not incurred any significant credit risk losses related to our deposits or derivative contracts.
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FLUOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Plans
Our stock plans provide for grants of nonqualified or incentive stock options, RSUs, restricted stock and performance-based award units, including VDI units. All grants of stock options and RSUs as well as performance-based units awarded to Section 16 officers in 2020, 2019 and 2018 can only be settled in company stock and are accounted for as equity awards.
All expense under stock-based awards is recognized based on the fair values of the awards. Stock option awards have grant exercise prices equal to the grant date market price of the company's stock. The fair value of grants of RSUs and restricted stock is determined using the closing price of our common stock on the date of grant but may be discounted for any post-vest holding periods. The grant date fair value of performance-based award units is determined by adjusting the closing price of the company's common stock on the date of grant for any post-vest holding period discounts and for the effect of market conditions, when applicable. Stock-based compensation expense is generally recognized over the required service period, or over a shorter period when employee retirement eligibility is a factor.
We also grant SGI awards and performance-based awards to non-Section 16 executives which are settled in cash. These awards are classified as liabilities and remeasured at fair value through expense at the end of each reporting period using our closing stock price until the awards are settled. Awards that may be settled in cash or company stock at the election of the recipient are also classified as liability awards.
Leases
We recognize right-of-use assets and lease liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised. Leases are classified as either finance or operating leases. This classification dictates whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
Our right-of use assets and lease liabilities primarily relate to office facilities, equipment used in connection with long-term construction contracts and other personal property. Certain of our facility and equipment leases include one or more options to renew, with renewal terms that can extend the lease term up to 10 years. The exercise of lease renewal options is at our discretion. Renewal periods are included in the expected lease term if they are reasonably certain of being exercised by us. Certain leases also include options to purchase the leased property. None of our lease agreements contain material residual value guarantees or material restrictions or covenants.