Fluor 2001 Annual Report Download - page 38

FLUOR CORPORATION 2001 ANNUAL REPORT
INVENT ORIES Inventories are stated at the lower of cost or mar-
ket using specific identification or the average cost method.
Inventories are included in other current assets in the accompany-
ing consolidated balance sheet and comprise:
December 31, December 31,
2001 2000
(in thousands)
Equipment for sale/rental $17,354 $22,911
Supplies and other 25,626 26,376
$42,980 $49,287
ADVANCES FROM AFFILIATE Advances from affiliate relate to
cash received by a joint venture entity from advance billings on con-
tracts, which are made available to the partners. Such advances are
classified as an operating liability of the company.
DERIVATIVES AND HEDGING Effective November 1, 2000, the
company adopted Statement of Financial Accounting Standards No.
133,“Accounting for Derivative Instruments and Hedging Activities,”
(SFAS 133) as amended, which requires that all derivative instru-
ments be reported on the balance sheet at fair value. The adoption
of SFAS 133 did not have a material effect on the company’s finan-
cial statements.
The company uses forward exchange contracts to hedge certain
foreign currency transactions entered into in the ordinary course of
business. At December 31, 2001, the company had approximately $10
million of foreign exchange contracts outstanding relating to contract
obligations. The company does not engage in currency speculation.
The forward exchange contracts generally require the company to
exchange U.S. dollars for foreign currencies at maturity, at rates
agreed to at inception of the contracts. If the counterparties to the
exchange contracts (AA or A+ rated banks) do not fulfill their oblig-
ations to deliver the contracted currencies, the company could be at
risk for any currency related fluctuations. The contracts are of vary-
ing duration, none of which extend beyond March 2004. The company
formally documents its hedge relationships at inception, including
identification of the hedging instruments and the hedged items, as
well as its risk management objectives and strategies for undertak-
ing the hedge transaction. The company also formally assesses both
at inception and at least quarterly thereafter, whether the derivatives
that are used in hedging transactions are highly effective in offset-
ting changes in the fair value of the hedged items. All existing fair value
hedges are determined to be highly effective. As a result, the impact
to earnings due to hedge ineffectiveness is immaterial for 2001 and
the two months ended December 31, 2000. The transition adjustment
upon adoption was immaterial.
Prior to November 1, 2000, unrealized gains and losses on for-
ward exchange contracts were deferred and included in the mea-
surement of the related foreign currency transaction. The amount of
any gain or loss on these contracts for the years ended October 31,
2000 and 1999 was immaterial.
The company limits exposure to foreign currency fluctuations
in most of its engineering and construction contracts through provi-
sions that require client payments in U.S. dollars or other currencies
corresponding to the currency in which costs are incurred. As a result,
the company generally does not need to hedge foreign currency cash
flows for contract work performed. Under certain limited circum-
stances, such foreign currency payment provisions could be deemed
embedded derivatives under SFAS 133. At the November 1, 2000 imple-
mentation date and as of December 31, 2001 and 2000, the company
had no significant embedded derivatives in any of its contracts.
CONCENTRATIONS OF CREDIT RISK The majority of accounts
receivable and all contract work in progress are from clients in var-
ious industries and locations throughout the world. Most contracts
require payments as the projects progress or in certain cases advance
payments. The company generally does not require collateral, but
in most cases can place liens against the property, plant or equip-
ment constructed or terminate the contract if a material default
occurs. The company maintains adequate reserves for potential credit
losses and such losses have been minimal and within manage-
ment’s estimates.
S T OCK PLANS The company accounts for stock-based compen-
sation using the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No.25, “Accounting for Stock Issued
to Employees,” and related Interpretations. Accordingly, compen-
sation cost for stock options is measured as the excess, if any, of the
quoted market price of the company’s stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Compensation cost for stock appreciation rights and performance
equity units is recorded based on the quoted market price of the
company’s stock at the end of the period.
COMPREHENSIVE INCOME Statement of Financial Accounting
Standards No. 130, “Reporting Comprehensive Income,” establishes
standards for reporting and displaying comprehensive income and
its components in the consolidated financial statements. For the
company, the only other component of accumulated other compre-
hensive income is the change in the cumulative foreign currency
translation adjustments recorded in shareholders’ equity.
DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).
Under SFAS 144 a component of a business that is held for sale
is reported in discontinued operations if (i) the operations and cash
flows will be, or have been, eliminated from the on-going operations
of the company and, (ii) the company will not have any significant
continuing involvement in such operations. In the quarter ended
September 30, 2001, the company adopted the provisions of SFAS 144
effective January 1, 2001.
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