Fluor Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Dollar figures are U.S. dollars unless stated otherwise. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2019 | Six months 2019 | Comparable 2018 |
|---|---|---|---|
| Revenue | $4.09 billion, down 16% | $8.29 billion, down 15% | $4.88 billion; $9.71 billion |
| Net earnings (loss) attributable to Fluor | ($555 million) | ($613 million) | $115 million; $97 million |
| Diluted EPS | ($3.96) | ($4.38) | $0.81; $0.69 |
| Operating cash flow | Not separately presented | $91 million provided | $133 million used |
| Cash and cash equivalents | $1.86 billion at June 30, 2019 | $1.76 billion at December 31, 2018 |
- Q2 cost of revenue was $4.71 billion, exceeding revenue by about $612 million. Segment losses totaled $573 million. Results also included $46 million of restructuring and exit costs in Q2 ($73 million for the first half).
- At June 30, current assets were $5.16 billion and current liabilities $4.06 billion. Marketable securities were $73 million. Cash and securities totaled about $1.93 billion, though $645 million of cash was held by consolidated variable-interest entities and may not be readily available for general use.
- Short-term borrowings were $42 million and long-term debt $1.66 billion. The company reported $1.5 billion of borrowings and letters of credit outstanding under committed and uncommitted facilities, and stated it was in compliance with debt covenants.
- Six-month investing cash flow was $44 million provided; financing cash flow was $58 million used, including $59 million in dividends paid. Q2 dividends declared were $0.21 per share.
Material changes and operating trends
- Management attributed the sharp earnings deterioration to project forecast revisions and negotiations with clients, subcontractors and suppliers. It said earnings declined even excluding the identified charges.
- Energy & Chemicals: Q2 revenue fell 31% to $1.40 billion; segment loss was $229 million. Charges included $186 million on a fixed-price offshore project and $87 million on downstream and upstream work. The segment also expensed $26 million of pre-contract costs. Management noted a continuing lack of broad-based awards could pressure near-term earnings.
- Mining, Industrial, Infrastructure & Power: Q2 revenue rose 13% to $1.51 billion, but the segment lost $123 million. Charges included $109 million related principally to three fixed-price gas-fired power projects and $55 million for infrastructure project cost growth and change-order negotiations. Management said infrastructure margins were likely to remain under pressure in the near term.
- Government: Q2 revenue fell 29% to $612 million; segment loss was $226 million. A $233 million charge reflected forecast revisions, cost growth and assessments of unapproved change orders on a fixed-price U.S. government project. If the change orders are not resolved favorably, revenue and segment profit could be further adversely affected.
- Diversified Services: Q2 revenue declined 13% to $578 million and segment profit fell to $4 million from $29 million, reflecting lower activity and client and joint-venture negotiations.
- First-half new awards were $5.8 billion, down from $7.9 billion. Backlog was $35.5 billion, up from $29.3 billion a year earlier, but included net adjustments and cancellations of $2.1 billion in the first half. About 49% of backlog was fixed-price, lump-sum or guaranteed-maximum contracts, compared with 37% a year earlier. Remaining unsatisfied performance obligations were $32.7 billion; cancellations, deferrals and scope changes remain possible.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said available cash, operating cash generation and unused credit capacity should support operating requirements for at least the next 12 months.
- The company expects approximately $175 million of total restructuring and other exit costs, including $73 million recognized in the first half. The plan principally involves international Stork and equipment operations and is expected to be substantially completed in 2019 or early 2020; further activities may be identified.
- Management cited project cost and schedule estimation, fixed-price contract execution, client and subcontractor performance, change-order recovery, awards and backlog conversion, payment delays, litigation, foreign exchange and government-contract requirements among the risks to results. Foreign losses for which no tax benefit could be recognized also affected effective tax rates.
- Outstanding performance guarantees had a stated maximum potential payment amount of $18 billion; the recorded liability was not material. The filing says amounts payable beyond estimated costs to complete are not estimable.
- Fluor is defending a Santos claim seeking approximately AUD $1.47 billion related to an Australian project; it said it believes the claims lack merit and does not consider a loss probable. The company also disclosed shareholder litigation and a related derivative action, and stated it did not believe a loss was probable in those matters.
- The company had recorded $196 million of claim revenue in contract assets at June 30, versus $166 million at year-end, and said recovery was probable. It also reported $108 million of aged and disputed receivables on a Middle East chemicals project. About $50 million of legal-matter settlements were expected to be recognized in future periods as received, some relating to discontinued operations.
Important facts for investors to verify
- Whether the major fixed-price project losses are contained, particularly the offshore, power, infrastructure and U.S. government projects.
- Progress and recoverability of disputed change orders, the $108 million aged receivable, and recorded contract claims; distinguish recognized claims from cash collected.
- Backlog quality and conversion, including the increased fixed-price share, unfunded government backlog, and the effect of cancellations and scope revisions.
- Accessible liquidity after accounting for VIE-held cash, letters of credit and project funding needs; monitor working capital and customer advances.
- Actual restructuring costs and savings compared with the approximately $175 million estimate, and any additional approved actions.
- Developments in the Santos and shareholder litigation matters, performance guarantees, and the expected timing and receipt of settlement proceeds.