Fluor Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited results; comparisons are with the three months ended March 31, 2012 unless otherwise noted. Fluor provides engineering, procurement, construction and related services across multiple industries.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $7.19 billion | $6.29 billion |
| Gross profit | $341.9 million | $275.9 million |
| Gross margin | 4.8% | 4.4% |
| Earnings before taxes | $306.3 million | $240.8 million |
| Net earnings attributable to Fluor | $166.5 million | $154.9 million |
| Diluted EPS | $1.02 | $0.91 |
| Cash used in operating activities | $21.7 million | $47.1 million |
Revenue increased 14%, while earnings attributable to Fluor increased about 7%. Higher Oil & Gas and Industrial & Infrastructure performance drove earnings growth; the effective tax rate rose to 30.4% from 26.4%, partly offsetting the improvement. The prior-year rate benefited from a $16 million deferred tax benefit.
Segment profit was $293.6 million, up from $253.3 million. Oil & Gas revenue rose 36% and segment profit rose 42%; Industrial & Infrastructure profit rose 12%; Government profit rose 17% despite lower revenue; Global Services revenue and profit declined; Power revenue increased substantially but the segment reported a $6.8 million loss, including NuScale research and development spending.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $2.015 billion at March 31, down from $2.155 billion at year-end. Cash plus current and noncurrent marketable securities totaled approximately $2.5 billion.
- Total debt was approximately $514.7 million, comprising $18.5 million of current notes and $496.3 million of long-term debt. Debt-to-capital was 12.9%, down from 13.9% at December 31. Fluor reported compliance with debt covenants.
- Fluor reported $4.3 billion of committed and uncommitted credit lines, with $3.4 billion of unused capacity. Management said cash, operating cash generation and unused capacity were sufficient for at least the next 12 months.
- Cash used in investing activities was $52.3 million and cash used in financing activities was $43.1 million. Cash declined by $139.7 million overall, including a $22.6 million adverse foreign-exchange effect.
- The company declared a quarterly dividend of $0.16 per share. No dividends were paid in Q1 2013; the filing notes that Q4 2012 dividends were paid in December.
Orders, backlog and material changes
- New awards were $6.5 billion, down from $8.4 billion. Backlog at quarter-end was $37.5 billion, versus $42.5 billion a year earlier; 68% related to projects outside the United States.
- Oil & Gas backlog increased 11% year over year to $18.6 billion. Industrial & Infrastructure backlog fell 31% to $16.0 billion, reflecting weaker mining awards and two mining project cancellations totaling $2.0 billion in 2012. Government backlog rose 39% to $964 million; Power backlog was $1.9 billion.
- Effective January 1, 2013, operations and maintenance activities moved from Global Services to Industrial & Infrastructure, while Global Services added fabrication, construction and procurement activities. Prior-year segment information was recast.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management described strengthening upstream and petrochemical markets, but said mining investment decisions had been deferred and the duration of weaker mining conditions was uncertain. The effects of federal budget sequestration on government work were also uncertain.
- Management cited competitive pressure on margins and a work mix with more construction and customer-furnished materials, which typically carry lower margins than engineering work. Other risks include project execution and cost overruns, client or partner delays and defaults, cancellations, foreign-exchange and political risks, and tax audits.
- Greater Gabbard: after an adverse arbitration decision, Fluor recorded a $416 million pretax charge in Q4 2012. The client’s approximately $100 million counterclaim was being heard beginning April 15, 2013. Fluor said a loss was not probable and recorded no charge; an adverse outcome could materially affect earnings and cash flow.
- St. Joe Minerals litigation includes a prior jury award of $38.5 million compensatory and $320 million punitive damages. Fluor was awaiting an appeal decision and recorded no charge, stating it believed loss was not probable; unsuccessful appeals or indemnification efforts could result in a substantial charge.
- Performance guarantees outstanding were estimated at $6.0 billion; the recorded liability was immaterial. The company also disclosed $41 million of future funding commitments for unconsolidated VIEs. These arrangements and project claims may create exposure beyond amounts accrued.
- Fluor expected to contribute approximately $30 million to $60 million to defined-benefit pension plans during 2013; approximately $7 million had been contributed through March 31.
Most important facts for investors to verify
- Developments and potential financial exposure from the Greater Gabbard counterclaim and the St. Joe Minerals litigation.
- Whether mining-market weakness, deferred customer investment and project cancellations further reduce awards or backlog.
- Cash conversion and working-capital trends, especially receivables and customer advances, given negative operating cash flow in the quarter.
- Effects of federal sequestration and funding changes on Government segment revenue and backlog.
- Margin sustainability amid competitive pricing and changes in project mix, as well as the level of pension contributions and guarantee exposure.