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“Outsider” Leaves Fluor More Focused

‘Outsider’ Leaves Fluor More Focused

PHILIP CARROLL, Chairman, chief executive

Fluor Corp.

By CHRIS CZIBORR

Fluor Corp.’s split into two public companies early last year became the capstone of Chief Executive Philip Carroll’s reign at the Aliso Viejo engineering company.

Carroll, a former Shell Oil executive who became the first outsider to lead Fluor in 1998, split off the company’s coal operations into Massey Energy Co. a year ago. The engineering and construction operations re-mained with the new Fluor Corp. The deal was the next-to-last move in Carroll’s program to turn around Fluor, which faced a large debt and a falling share price when he came aboard. Come next month, Carroll plans to retire.

The shares of both companies surged in the wake of the deal. But in Fluor’s case, concerns about new power plant building in the troubled energy sector put a damper on things in the second half of 2001. Nonetheless, the split capped three years of restructuring by Carroll.

The marriage of Fluor,a knowledge-based service business,with a capital-intensive resource business like Massey had held both entities back, Carroll said.

“Massey could be a better coal company if it was not subject to the financial constraints that had to be in place for a company like Fluor,” Carroll said. “Investors didn’t know when they bought the old Fluor stock, ‘am I making a play in coal or am I making a play in the engineering construction industry?'”

That two such businesses were married made analysts and investors wary, according to Carroll.

“Some investors might know a lot about coal but they might not know a lot about the engineering construction business, and vice versa,” Carroll said. “It was obvious that both companies could better execute a highly focused strategy, and that’s what the markets said after the split was accomplished.”

Carroll said it wasn’t easy pulling off a split at a time when the heavy construction industry was facing a downturn.

“A lot of our customers and clients were putting off major capital projects, so we had to deal with both tough times and the restructuring and realignment of Fluor,” he said. “It’s a lot easier to do those things when the external environment is a little more friendly and growing.”

Analysts gave the split a nod.

It “changed the character of the two businesses,” said John Rogers, an analyst at Great Falls, Mont.-based D.A. Davidson & Co. “It got them to focus on each of their respective core operations.”

John Pritchard, a portfolio manager at Newport Beach-based Knightsbridge Asset Management LLC, praised the companies’ management. He noted that both Fluor and Massey in their first nine months of operations cut their respective debt burdens in half. Before the split, Fluor had $750 million in outstanding debt. The combined debt of Fluor and Massey by autumn had fallen to around $300 million.

Carroll said his legacy at Fluor is a clearer business focus and a better understanding of how financial performance drives shareholder value.

“And that has become a part of the culture of the company,” he said. “We’re now an engineering construction business as opposed to an engineering construction outfit.”

Another shift: Fluor is pickier than it used to be, thanks to Carroll.

“One of our basic problems in the past had been that, as we tried to grow backlog, we compressed profit margins that would be available to the Fluor shareholder,” he said. “By being more selective about the kind of work we go after and take on, and by being more careful about the commercial terms that we demand from customers and clients over the past year, we’ve been able to see that backlog grow.”

By early 2001, Fluor’s stock value had risen because of both the Massey split and the Western energy crisis, which spurred power plant construction orders. The stock later in the year began falling due to concerns about electricity rate caps discouraging plant construction in the U.S.

More recently, Fluor’s stock took another hit because of the collapse of Enron Corp.,investors fear the bankrupt Houston energy trader will cancel contracts with independent power producers.

“I think that the performance this year and the anticipation of a significant upturn next year and beyond should put the stock a little higher than it is right now,” Carroll said. “Equity markets are very volatile right now in this age of uncertainty, but I think investors will regain confidence in the company’s performance next year.”

The company builds power plants through Duke/Fluor Daniel, a joint venture with Charlotte, N.C.-based Duke Energy Corp.

Carroll said a slowdown by some independent power producers of their plans for investment and creation of new power plants could show up in reduced orders in 2002 and 2003, but that there would be no effect on earnings until 2004 or 2005.

Despite the woes in the electricity sector, Carroll remained upbeat.

“We have a very healthy backlog in power plants and that will allow us to have good profit and work throughout 2002 and 2003,” he said.

Analysts estimate power plant contracts added more than $1 billion to Fluor’s backlog for the year ended June 30, helping offset slowdowns in the mining, telecom and manufacturing sectors, where Fluor also does work.

“As the economy recovers,and we’re already seeing signs of it picking up across the country,demand for power is also going to return, and we’re going to see that the country needs additional generating capacity both on the West Coast and East Coast,” Carroll said. “I don’t see Enron or anything else altering the fact that you’ve got to have enough plants to keep the juice flowing.”

The final act of Carroll’s turnaround of Fluor will come on Feb. 6, when he will officially step down, to be replaced by 28-year Fluor veteran Alan Boeckmann.

Carroll said Boeckmann will “have the responsibility of keeping this company on track and drive strong growth in common earnings per share,” he said. “That’s always a challenge in our industry but one that he can get through very well.”

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