Fluor Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed July 31, 2014. Financial statements are unaudited. Fluor is a global engineering, procurement, construction and services company operating in Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $5.252 billion | $7.190 billion | $10.636 billion | $14.376 billion |
| Earnings from continuing operations attributable to Fluor | $163 million | $161 million | $312 million | $328 million |
| Diluted EPS from continuing operations | $1.02 | $0.98 | $1.93 | $2.00 |
| Net earnings attributable to Fluor, including discontinued operations | $78 million | $161 million | $227 million | $328 million |
| Diluted net EPS | $0.48 | $0.98 | $1.41 | $2.00 |
- Revenue declined 27% for the quarter and 26% for the first half, primarily because of lower mining and metals project activity. Q2 continuing earnings attributable to Fluor were approximately flat; first-half earnings declined modestly.
- Q2 total segment profit was $313 million versus $288 million; first-half segment profit was $581 million versus $582 million. Corporate G&A rose to $57 million in Q2 and $94 million in the first half, from $32 million and $65 million, respectively.
- Cash provided by operating activities was $426 million in the first half, versus $236 million a year earlier. Investing activities used $107 million and financing activities used $421 million; cash decreased by $101 million to $2.183 billion.
- Cash plus current and noncurrent marketable securities totaled approximately $2.7 billion. Current assets were $6.005 billion and current liabilities $3.571 billion at June 30.
- Debt was approximately $526 million, comprising $29 million of current borrowings and $497 million of long-term debt. Debt-to-capital was 12.6%, versus 12.3% at year-end; Fluor reported compliance with debt covenants.
- Fluor reported $5.4 billion of committed and uncommitted credit lines, with $4.2 billion of unused capacity. Management said cash, operating cash flow and unused capacity were expected to support requirements for at least the next 12 months.
Material changes and business trends
- Oil & Gas: Revenue was broadly level year over year, while segment profit increased to $167 million from $107 million in Q2 and to $305 million from $211 million in the first half. Higher-margin engineering mix and project performance contributed. Segment backlog rose to $24.2 billion from $18.7 billion.
- Industrial & Infrastructure: Revenue fell 52% in Q2 and 49% in the first half, chiefly from reduced mining and metals execution. Segment profit fell 25% and 23%, respectively. Backlog declined to $9.2 billion from $16.2 billion; mining investment decisions remained deferred.
- Government: Revenue declined 11% in Q2 and 16% in the first half, mainly as LOGCAP IV activity in Afghanistan wound down. First-half segment profit decreased to $26 million from $55 million. Backlog rose to $5.2 billion, including $4.0 billion of unfunded government contracts.
- Global Services: First-half revenue fell 5% and segment profit fell 30%, reflecting lower equipment activity and other business-line pressures.
- Power: Revenue fell as several projects neared completion. Segment profit included a $17 million accrual for qualifying NuScale costs under a DOE cost-sharing award, which helped offset weaker project performance.
- Consolidated backlog was $40.3 billion at June 30, 2014, versus $37.0 billion a year earlier. First-half awards were $16.5 billion, compared with $13.7 billion; backlog remains subject to cancellations, scope changes and deferrals.
Outlook, risks and unusual items
- Management described Oil & Gas upstream and petrochemical markets as improving, but noted a highly competitive environment and pressure on margins. Mining customers continued to defer major capital decisions, with timing of a recovery uncertain; Government activity was affected by LOGCAP IV reductions. The Power market had relatively weak demand for new generation.
- NuScale’s DOE cooperative agreement provides for up to $217 million of cost-sharing over several years, with DOE reimbursement of up to 43% of qualified expenditures. Future-year funding is subject to U.S. Congressional appropriations.
- Fluor recorded an $85 million after-tax discontinued-operations loss ($132 million before tax) related to St. Joe/Doe Run lead-business litigation. A Missouri appellate court reversed $240 million of punitive damages but upheld $38.5 million of compensatory and economic damages and $80 million of punitive damages; rehearing and transfer motions were pending. Fluor is pursuing indemnification. It could not estimate losses in 19 additional related lawsuits.
- Outstanding performance guarantees had a maximum potential payment amount of $14.1 billion, representing estimated remaining third-party work; amounts payable above estimated cost to complete were not estimable. The recorded guarantee liability was not material.
- Other stated risks include project execution and cost overruns, client or partner payment/default issues, contract cancellations, competition, litigation and indemnification recovery, regulatory and tax matters, foreign exchange, and availability of credit, bonding and letters of credit. Management reported no material changes to risk factors or market-risk disclosures.
- Fluor repurchased 4.2 million shares for $324 million in the first half and declared dividends of $0.42 per share, versus $0.32 in the prior-year half. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
Key facts for investors to verify
- Track whether Oil & Gas growth and margins offset continued mining-related weakness and the decline in Government project activity.
- Assess backlog composition and conversion, including the $4.0 billion of unfunded Government awards and exposure to cancellations or scope changes.
- Monitor developments, indemnification recovery and potential further charges in the St. Joe/Doe Run litigation, along with the additional related lawsuits.
- Review the scale and terms of performance guarantees, letter-of-credit usage, and project-level cost-to-complete exposure.
- Confirm NuScale award reimbursements and the availability of future DOE funding; assess whether higher corporate expenses and share repurchases remain sustainable.