Fluor Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Engineering, procurement, construction and maintenance services company. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the same periods in 2014; balance-sheet comparisons are with December 31, 2014.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $4.385B | $5.440B | $13.743B | $16.076B |
| Continuing-operations earnings attributable to Fluor | $176M | $183M | $469M | $495M |
| Net earnings attributable to Fluor | $171M | $70M | $464M | $296M |
| Diluted EPS from continuing operations | $1.21 | $1.15 | $3.17 | $3.08 |
| Diluted net EPS | $1.17 | $0.44 | $3.13 | $1.84 |
Revenue fell 19% for the quarter and 15% year to date. Continuing-operations earnings attributable to Fluor declined despite higher diluted EPS, as share repurchases reduced average shares outstanding. Net earnings increased mainly because prior-year discontinued-operations losses were substantially larger. Q3 2015 included a $68M pretax gain on the sale of a subsidiary interest. The effective tax rate on continuing operations was 32.9% for Q3 and 33.0% for the first nine months.
Margins and segments. Oil & Gas segment profit rose to $190M in Q3 and $575M year to date, with margins of 7.9% and 7.5%, respectively; management attributed improvement largely to a shift toward higher-margin engineering work. Industrial & Infrastructure segment profit declined to $45M and $175M, with margins of 4.9% and 5.7%. Government segment profit was $30M and $62M; margins were 4.5% and 3.2%. Global Services segment profit fell to $10M and $39M, with margins of 7.9% and 10.4%. Power recorded losses of $34M and $53M, versus profits of $6M and $19M a year earlier.
Cash flow and liquidity. Nine-month operating cash flow was $570M, versus $407M in 2014, reflecting more favorable working-capital changes; this included $312M of cash outflows related to discontinued operations. Investing activities used $170M and financing activities used $534M. Cash and cash equivalents were $1.781B at quarter-end, down from $1.993B at year-end; cash plus current and noncurrent marketable securities totaled $2.3B. Management stated that cash, operating cash generation and $4.2B of unused credit capacity were sufficient for at least the next 12 months. Cash held by consolidated VIEs, $287M, may not be readily available for general purposes.
Long-term debt due after one year was $993M; current borrowings were zero, compared with $29M at year-end. Debt-to-capital was 24.5%, versus 24.7% at year-end. The company had $5.7B in committed and uncommitted credit lines, with $1.5B of letters of credit and borrowings outstanding, and reported compliance with debt covenants. Nine-month share repurchases totaled $360M; dividends declared were $0.21 per share each quarter.
Material changes, outlook and risks
- Consolidated new awards were $14.0B for the first nine months, down from $22.5B in 2014. Backlog was $41.7B at September 30, versus $42.3B a year earlier. Currency movements reduced backlog by approximately $2.3B year to date. Backlog may be cancelled, deferred or revised.
- Oil & Gas revenue fell as large upstream projects progressed toward completion, partly offset by downstream activity. Backlog in the segment increased to $29.1B from $26.6B. Management noted that lower oil prices had affected current projects and award timing.
- Industrial & Infrastructure faced deferred mining investment and lower mining and infrastructure activity. Government revenue benefited from newer projects but continued to be affected by reduced LOGCAP IV activity in Afghanistan. Power losses reflected forecast revisions on a gas-fired plant and higher NuScale costs.
- On September 30, Fluor sold 50% of its principal Spanish operating subsidiary for approximately $46M cash, retained a 50% noncontrolling interest, deconsolidated the subsidiary and recognized a $68M pretax gain. A China fabrication-yard joint venture commitment calls for $350M initially after regulatory approval and a further $140M targeted for Q3 2016.
- The company recorded a $5M after-tax loss in 2015 related to settlements and legal costs involving its divested lead business, and is pursuing indemnification from the buyer. It paid $306M in January 2015 for a settlement related to the matter. Management said resolution of open matters was not expected to materially adversely affect consolidated financial position or results, but litigation outcomes remain uncertain.
- The U.S. defined-benefit pension plan was expected to be settled in late 2015. Fluor recorded a $9M pretax settlement charge in Q3 and warned that settlement could trigger significant additional expense, including recognition of approximately $285M of accumulated actuarial losses; it did not expect settlement to materially affect cash position. Up to $100M of pension contributions were expected for 2015, including amounts for settlement.
- Outstanding performance guarantees had a stated maximum potential amount of $20.5B; the recorded liability was not material, but amounts potentially payable above estimated costs to complete were not estimable. The company also disclosed ordinary-course project, government-contract, tax and other contingencies.
No specific earnings or revenue guidance is provided in the supplied filing text. Management cited continued margin pressure, cyclical and commodity-sensitive markets, project execution and cost-overrun risks, award and cancellation uncertainty, foreign-exchange exposure, and risks involving clients, partners, suppliers and litigation. The filing reported no material changes to risk factors or market-risk disclosures and stated that disclosure controls were effective.
Investor verification priorities
- Assess whether new awards and backlog can offset lower revenue as large projects wind down, including the impact of currency movements and possible cancellations.
- Review the sustainability of Oil & Gas margin improvement and the causes and potential further impact of Power project forecast revisions.
- Verify the expected cost, timing and cash implications of settling the U.S. pension plan.
- Track the lead-business indemnification action and any further settlement payments, as well as the assumptions supporting the Spanish subsidiary sale gain and retained-interest valuation.
- Evaluate liquidity available for general use, including VIE restrictions, project working-capital needs, credit-facility usage and the planned $490M China joint-venture investment.
- Monitor the large guarantee exposure, government-contract audits, tax examinations and other project claims and contingencies.