Fluor Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Unless noted otherwise, financial amounts are in U.S. dollars. Comparisons are with the corresponding 2016 periods.
Business context and results
Fluor provides engineering, procurement, construction, maintenance and government services through four segments: Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government; and Diversified Services.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.94 billion | $4.77 billion | $14.49 billion | $14.05 billion |
| Net earnings attributable to Fluor | $94 million | $5 million | $131 million | $211 million |
| Diluted EPS | $0.67 | $0.03 | $0.93 | $1.50 |
| Operating cash flow | Not stated for the quarter | $551 million | $452 million |
Q3 revenue increased 4%; nine-month revenue increased 3%. Nine-month earnings fell substantially, principally reflecting $219 million in pretax charges ($140 million after tax, or $0.99 per diluted share) for estimated cost growth at three fixed-price gas-fired power projects. Prior-year results included charges for a U.S. petrochemical project: $241 million pretax in Q3 and $265 million for the nine months. Excluding those project charges, management said 2017 earnings still declined, primarily in Energy, Chemicals & Mining.
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $1.83 billion, and current and noncurrent marketable securities totaled $309 million. Cash plus marketable securities was approximately $2.14 billion, broadly unchanged from year-end 2016. Some cash is held by consolidated joint ventures and may not be available for general use.
- Current assets were $5.51 billion and current liabilities $3.54 billion. Total debt was approximately $1.62 billion, including $1.58 billion long-term debt and $37 million of current revolving-facility and other borrowings. The company reported compliance with debt covenants.
- Operating cash flow was $551 million, versus $452 million in the prior-year nine-month period; management attributed the increase mainly to favorable working-capital changes, partly offset by lower earnings. Investing activities used $456 million and financing activities used $160 million.
- Two committed revolving loan and letter-of-credit facilities total $3.5 billion and mature in February 2022. The filing reports $1.7 billion of borrowings and letters of credit outstanding across committed and uncommitted lines; it does not clearly state the remaining immediately available capacity.
- Management said cash, operating cash generation and unused credit capacity should be sufficient for operating needs for at least the next 12 months.
Segments, backlog and material changes
- Energy, Chemicals & Mining: Nine-month revenue declined 3% to $7.02 billion. Segment profit was $319 million, versus $248 million, but management cited weaker underlying performance from lower volumes, project mix and reduced engineering hours. Backlog was $18.5 billion.
- Industrial, Infrastructure & Power: Nine-month revenue rose 13% to $3.36 billion, while segment results were a $142 million loss, versus $92 million profit, primarily due to the $219 million project cost-growth charges. Backlog was $8.1 billion.
- Government: Nine-month revenue rose 12% to $2.28 billion and segment profit rose to $79 million from $66 million. Backlog was $3.6 billion, including $1.0 billion of unfunded government contracts.
- Diversified Services: Nine-month revenue rose 2% to $1.83 billion and segment profit increased to $94 million from $91 million. Backlog was $2.7 billion.
- Consolidated backlog fell to $32.9 billion from $44.3 billion a year earlier. The decline reflected removal of the V.C. Summer and Plant Vogtle nuclear projects, a shortened contractual term for the Magnox project, and work performed exceeding new awards. Nine-month awards were $9.3 billion, down from $18.1 billion.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management described Energy, Chemicals & Mining as positioned for new activity, while noting depressed commodity prices were delaying client investment and project awards; it also reported renewed interest in some metal-replacement markets.
- Westinghouse filed for Chapter 11 in March 2017. The V.C. Summer owner cancelled the project in July, and the Plant Vogtle owner cancelled its Westinghouse contract in August and engaged Fluor under a bridge contract. Fluor reported $66 million due for pre-petition V.C. Summer services and $2 million for Plant Vogtle; it did not expect project close-out to materially affect results.
- Santos sued Fluor Australia seeking approximately AUD $1.47 billion. Fluor disputes the claims, is defending the case, and stated that a loss was not considered probable; no charge was recorded.
- Performance guarantees had a maximum potential payment amount estimated at $15 billion, representing remaining third-party work on contracts. The recorded liability was not material; actual amounts payable beyond estimated completion costs were not estimable.
- Fluor had recorded $80 million of claim revenue for incurred costs and $43 million of disputed supplier/subcontractor back charges at quarter-end; management considered recovery probable. These judgments and recoverability remain relevant to results.
- For 2018, Fluor planned to adopt the new revenue-recognition standard using the modified retrospective method. It expected engineering and construction contracts typically to be treated as a single performance obligation, changing revenue and margin recognition patterns. Management was still evaluating the financial and control impacts.
- Other cited risks include fixed-price project execution and cost overruns, cancellations and scope changes, award timing, foreign exchange, client and partner credit, litigation, and market cyclicality. Management reported no material change in disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- Progress, remaining cost estimates and potential further charges on the three gas-fired power projects, and performance of the Industrial, Infrastructure & Power segment.
- Collections and recovery of Westinghouse-related receivables, and developments in the Santos litigation and other contract claims.
- Backlog quality, cancellations, unfunded government work, and whether awards recover relative to work performed.
- Cash availability after accounting for joint-venture restrictions, advance billings and the actual undrawn capacity of credit facilities.
- Revenue-recognition adoption effects, including transition adjustments and changes to timing of revenue and margin recognition.