Fluor Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Fluor provides engineering, procurement, construction, maintenance and government services through four segments: Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government; and Diversified Services.
Financial performance
- Revenue: $4.836 billion, up 9% from $4.424 billion. Growth in Industrial, Infrastructure & Power, Government and Diversified Services more than offset a decline in Energy, Chemicals & Mining.
- Profit: Net earnings attributable to Fluor were $60.6 million, down 42% from $104.3 million. Diluted EPS was $0.43 versus $0.74. Earnings before tax fell to $93.4 million from $189.2 million.
- Margins: Gross profit was approximately $150 million, or 3.1% of revenue, versus $256 million, or 5.8%, a year earlier. Net margin attributable to Fluor was approximately 1.3% versus 2.4%.
- Cash flow: Operating cash flow was $270 million, compared with $115 million. Investing used $96 million, versus $560 million; financing used $77 million, compared with $171 million provided in Q1 2016. Cash and cash equivalents increased by $117 million to $1.968 billion.
- Liquidity: Cash plus current and noncurrent marketable securities totaled approximately $2.18 billion. Current assets were $5.56 billion and current liabilities $3.68 billion. Management said available cash, operating cash flow and unused credit capacity were expected to cover operating needs for at least 12 months. Some cash held by consolidated joint ventures and partnerships may not be readily available for general use.
- Debt: Balance-sheet current borrowings were $40.9 million and long-term debt was $1.526 billion. Fluor reported $1.8 billion of borrowings and letters of credit outstanding under committed and uncommitted lines; it was in compliance with debt covenants at quarter-end.
Changes versus Q1 2016
- Segment profit fell to $133 million from $241 million. Energy, Chemicals & Mining profit declined to $88 million from $182 million, reflecting a shift from higher-margin engineering to construction work, lower activity and currency losses. Industrial, Infrastructure & Power recorded a $6.7 million loss versus $11.9 million profit, including approximately $30 million of cost increases and forecast revisions, primarily on a South Carolina gas-fired power plant.
- Government segment profit rose to $29 million from $17 million, helped by project activity and favorable close-out resolution. Diversified Services profit declined to $23 million from $30 million; management cited Stork’s seasonal first-quarter pattern.
- New awards were $2.3 billion, down from $4.7 billion. Backlog was $41.6 billion versus $46.0 billion a year earlier, reflecting project adjustments and work performed exceeding awards in Energy, Chemicals & Mining.
- Operating cash flow improved mainly because of favorable working-capital changes. Corporate G&A declined to $45 million from $55 million, partly because prior-year expenses included Stork acquisition and integration costs.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management noted that depressed commodity prices continued to affect award timing and execution in Energy, Chemicals & Mining, while describing the segment as positioned for new project activity.
- Westinghouse filed for Chapter 11 on March 29, 2017. Fluor’s backlog included $6.4 billion associated with two nuclear-project subcontracts, and its quarter-end assets included $169 million of receivables and $60 million of work in process for pre-bankruptcy services. Fluor said it expected recovery based on liens and agreements with project owners; backlog had not yet been adjusted while owners reviewed project scope and continuation.
- Fluor faces a Santos claim in Australia seeking approximately AUD $1.47 billion. Fluor disputes the claims, is defending them, and said it did not believe a loss was probable; no charge was recorded.
- Outstanding performance guarantees had a stated maximum potential payment amount of $14 billion, representing estimated remaining third-party work on contracts; the recorded guarantee liability was not material. Potential payments above estimated completion costs were not estimable.
- Claim revenue recognized for costs incurred was $66 million at quarter-end, up from $61 million at year-end 2016; disputed supplier/subcontractor back charges were $41 million. Management considered recovery probable.
- The effective tax rate was 17.2%, versus 37.1%, primarily due to a worthless-stock deduction related to an insolvent foreign subsidiary. This benefited reported earnings and may not be recurring.
- Fluor expects to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method. It expects engineering and construction contracts typically to be treated as a single performance obligation, changing revenue and margin recognition patterns; the financial impact was still under evaluation.
Most important facts for investors to verify
- Recovery of Fluor’s Westinghouse-related receivables and work in process, and the eventual scope, schedule and backlog treatment of the two nuclear projects.
- Whether project cost revisions—especially the South Carolina power plant—and the shift toward lower-margin construction work lead to further margin pressure.
- Conversion of backlog into awards and revenue, including the effects of commodity-market conditions, cancellations and the Magnox contract-term adjustment.
- Cash availability after considering VIE restrictions, working-capital needs, guarantees, letters of credit and the company’s other commitments.
- Potential outcomes of the Santos litigation, tax examinations and other claims, and the eventual effect of the 2018 revenue-recognition change.