FLR

Business Context and Reporting Period

Fluor Corporation (NYSE: FLR) reported financial results for the third quarter ended September 30, 2019. The company is currently undergoing a strategic review and restructuring to return to operational excellence. During the quarter, management committed to a plan to sell its government and AMECO equipment businesses, which are now reported as discontinued operations.

Key Financial Metrics

Cash Flow (Nine Months Ended Sept 30, 2019): Operating activities provided $67 million; investing activities provided $75 million; financing activities utilized $87 million.

Material Changes vs. Prior Period

• Significant Losses: The company reported a net loss from continuing operations of $782 million, a sharp reversal from a $69 million profit in the prior year. This was driven by non-cash charges totaling $880 million, including a $546 million valuation allowance against deferred-tax assets, a $290 million impairment charge (COOEC-Fluor and Sacyr-Fluor joint ventures), and $44 million in restructuring costs.
• Segment Performance:
  • Energy & Chemicals: Profit increased to $85 million from $50 million, despite revenue declining to $1.6 billion from $1.9 billion.
  • Mining & Industrial: Profit rose to $57 million from $21 million on higher revenue ($1.4 billion vs $1.0 billion), aided by a favorable dispute resolution.
  • Infrastructure & Power: Profit collapsed to $1 million from $102 million due to lower-margin projects and the absence of a $125 million gain on a joint venture sale recorded in 2018.
  • Other: Reported a loss of $96 million, including $79 million in project adjustments and $14 million in NuScale expenses.
• Corporate Expenses: Corporate G&A expense dropped significantly to $10 million from $61 million year-over-year due to lower compensation and foreign exchange gains.
• New Awards: Total new awards for continuing operations fell to $2.6 billion from $6.3 billion, heavily impacted by a lack of large mining awards compared to the prior year.

Guidance, Outlook, and Risks

• Guidance: Fluor has suspended full-year 2019 guidance. However, management anticipates Q4 margins of 4-5% for Energy & Chemicals and Diversified Services, and approximately 2% for Mining & Industrial and Infrastructure & Power.
• Management Commentary: CEO Carlos Hernandez stated the strategic review is complete and restructuring is underway, focusing on returning to consistent profitability with the right people and global footprint.
• Risks and Contingencies:
  • Discontinued Operations: Results from government and AMECO businesses are now classified as discontinued operations pending sale.
  • NuScale: The company incurred $14 million in expenses related to NuScale in Q3 and did not provide funding during the quarter.
  • Project Execution: Risks include cost overruns, delays, and the cyclical nature of the Energy & Chemicals market.
  • Legal and Tax: Significant exposure to litigation outcomes and tax matters, evidenced by the large valuation allowance charge.

Investor Verification Checklist

• Verify the sustainability of the $546 million non-cash tax valuation allowance and its impact on future effective tax rates.
• Confirm the timeline and expected proceeds from the sale of the government and AMECO businesses (discontinued operations).
• Assess the progress of the restructuring plan and the timeline for achieving the targeted Q4 margins.
• Monitor the status of the NuScale project and potential future funding requirements.
• Review the backlog composition, noting the shift toward Infrastructure & Power awards and the decline in Mining & Industrial backlog.