Fluor Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Comparisons are with the corresponding 2015 periods unless noted. Fluor provides engineering, procurement, construction, government, and maintenance services. Stork has been consolidated since its March 1, 2016 acquisition.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $4.856B | $4.810B | $9.280B | $9.359B |
| Earnings attributable to Fluor | $101.8M | $148.5M | $206.1M | $292.6M |
| Diluted EPS | $0.72 | $1.00 | $1.46 | $1.96 |
| Operating cash flow | Not separately provided for Q2 | $90.5M | $204.2M | |
| Gross margin (revenue less cost of revenue) | 5.1% | 6.1% | 5.4% | 6.3% |
- H1 operating cash flow fell primarily because working capital increased more sharply. Capital expenditures were $107.3M; operating cash flow less capital expenditures was approximately negative $16.8M.
- At June 30, cash and cash equivalents were $1.627B; current and noncurrent marketable securities totaled $288.8M. Combined cash and securities were $1.916B, down from $2.371B at year-end 2015. Some cash held by consolidated variable interest entities may not be readily available for general purposes.
- Current borrowings were $166.1M and long-term debt was $1.547B, versus $986.6M of long-term debt and no current borrowings at December 31, 2015. Debt includes senior notes and borrowings associated with Stork and its refinancing. Fluor reported compliance with all debt covenants.
- Committed and uncommitted credit lines totaled $6.0B; $2.0B was outstanding in borrowings and letters of credit, leaving approximately $4.0B of unused capacity. Management said cash, operating cash generation, and unused credit capacity were sufficient for at least the next 12 months.
Material changes and operating trends
- Revenue was nearly flat in Q2 and down modestly for H1, while earnings attributable to Fluor declined 31% in Q2 and 30% in H1. Lower Energy, Chemicals & Mining contributions, higher corporate expenses, and higher net interest expense weighed on results. The effective tax rate rose to 33.8% for Q2 and 35.5% for H1, partly due to foreign losses without tax benefits; the prior-year comparison benefited from an IRS settlement.
- Energy, Chemicals & Mining revenue fell 24% in Q2 and 21% in H1; segment profit fell 45% and 31%, respectively. Management cited weaker mining activity, completed or winding-down projects, and forecast revisions on two projects. Segment margins were 5.1% and 6.3% for Q2 and H1, versus 7.0% and 7.2%.
- Industrial, Infrastructure & Power revenue rose 74% in Q2 and 63% in H1, driven by power project execution. Segment profit increased to $51.4M in Q2 and $63.3M in H1. New awards included major infrastructure and power projects.
- Government revenue rose 9% in Q2 and 8% in H1; segment profit increased 28% and 22%. Growth included the Idaho Cleanup Project Core Contract and nuclear decommissioning work. LOGCAP IV activity and pressure on environmental and nuclear margins remained offsets.
- Maintenance, Modification & Asset Integrity revenue rose 96% in Q2 and 59% in H1, including Stork. Segment profit was broadly flat in Q2 and down 5% in H1; margins fell to 4.4% and 5.2%, respectively, partly reflecting Stork’s inclusion and weaker power services margins.
- Consolidated H1 new awards were $11.1B, up from $8.7B. Backlog was $47.3B at June 30, 2016, versus $41.6B a year earlier; the increase was driven largely by Industrial, Infrastructure & Power awards and the Stork acquisition. Backlog remains subject to cancellations, scope changes, and deferrals.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said lower oil prices had delayed awards and slowed execution on some energy projects, while mining customers continued to defer major investment decisions. It described downstream, petrochemical, and select upstream markets as better positioned for project activity.
- Fluor acquired Stork for an aggregate purchase price of approximately $756M, including assumed debt and other liabilities. Purchase accounting remained provisional; goodwill was preliminarily recorded at $447M. Stork contributed $391M of Q2 revenue and $4M of Q2 earnings, and $512M of H1 revenue and $7M of H1 earnings. Integration and transaction costs were recorded in corporate expenses.
- Fluor invested $350M in the 49%-owned COOEC Fluor Heavy Industries joint venture and expects to make an additional $140M investment.
- Outstanding performance guarantees could require payments of up to $21.7B based on remaining work to be performed by or for third parties; the recorded guarantee liability was not material. Amounts payable beyond estimated completion costs were not estimable. Management did not expect open litigation and claims to materially adversely affect consolidated financial position or results.
- Fluor had recorded $49M of claim revenue for costs incurred to date, compared with $30M at year-end 2015; recovery was considered probable by management. Tax audits and final outcomes of tax positions could differ materially from recorded reserves.
- Other principal risks identified include project cost overruns or delays, client payment defaults or cancellations, joint venture and subcontractor performance, commodity-market cycles, competition and margin pressure, foreign exchange, cybersecurity, regulatory and legal matters, and acquisition integration.
Important facts for investors to verify
- Whether project forecast revisions and weaker commodity-linked activity continue to reduce Energy, Chemicals & Mining profit and backlog.
- Stork’s post-acquisition profitability, integration costs, and final purchase-price allocation.
- Working-capital trends and conversion of earnings and backlog into operating cash flow.
- Availability and terms of credit facilities, debt levels, and the capacity to meet performance guarantees and project obligations.
- Backlog quality, including unfunded government contracts, project cancellations or scope reductions, and the extent of claims included in contract work in progress.