Fluor Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Results are unaudited.
Business context and performance
Fluor provides engineering, procurement, construction and related services across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Revenue growth was led by Industrial & Infrastructure, particularly mining and metals; Power revenue declined as major projects neared or reached completion.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $6.034bn | $5.152bn | $11.092bn | $10.071bn |
| Earnings before taxes | $281.2m | $259.1m | $522.3m | $492.2m |
| Net earnings attributable to Fluor | $165.5m | $157.4m | $305.2m | $294.0m |
| Diluted EPS | $0.94 | $0.87 | $1.72 | $1.63 |
| Operating cash flow | Not separately stated for the quarter | $427.9m | $(227.4)m |
At June 30, cash and cash equivalents were $1.946bn and current plus noncurrent marketable securities totaled $542.8m. Total debt was approximately $43.3m; debt-to-capital was 1.2%, down from 3.2% at year-end 2010. Fluor reported $3.8bn of committed and uncommitted credit lines, $1.3bn of letters of credit outstanding and $2.5bn of unused credit capacity. Management said available cash, operating cash generation and unused capacity should fund requirements for at least the next 12 months. The company was in compliance with debt covenants.
Six-month capital expenditures were $158.0m; dividends paid were $43.9m. The company repurchased 5.1m shares for $358.7m in the first half. The declared dividend was $0.125 per share per quarter.
Material changes versus comparable periods
- Q2 revenue increased 17%; first-half revenue increased 10%. Fluor-attributable earnings rose 5% in Q2 and 4% for the first half; diluted EPS rose to $0.94 and $1.72, respectively.
- Industrial & Infrastructure revenue increased 43% in Q2 and 50% for the first half; segment profit rose 125% and 151%. Oil & Gas first-half revenue fell 7% and segment profit fell 31%, with margins pressured by a shift toward lower-margin construction work.
- Power revenue fell 56% in Q2 and 58% for the first half; segment profit fell 40% and 44%. Government revenue grew, but segment profit declined. Global Services revenue and segment profit increased.
- New awards were $9.7bn in Q2 and $15.9bn in the first half. Backlog reached $40.3bn, up 34% from June 30, 2010; approximately 81% was for projects outside the U.S. Backlog can still be affected by cancellations or scope changes.
- Operating cash flow improved from a $227.4m use to $427.9m provided, reflecting earnings and a smaller working-capital use than in the prior-year period.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management cautioned that competitive conditions and margin pressure may continue, with a mix shift toward construction and other lower-margin work.
- Management expected to contribute $50m–$70m to defined-benefit pension plans during 2011; approximately $10m had been contributed in the first half.
- For the Greater Gabbard offshore wind project dispute, Fluor had recognized $233m of claim revenue for costs incurred and said further project costs and claim revenue were expected. The client had withheld $149m for liquidated damages. Failure to obtain schedule relief or recover claims could result in an earnings charge.
- In late July 2011, after quarter-end, a jury verdict in the Alexander/Preston lead-business litigation awarded plaintiffs $38.5m in compensatory and economic damages and $320m in punitive damages. Fluor said it would appeal, believed the verdict would be overturned and did not consider a loss probable; no charge was recorded. The company also cited indemnification rights.
- Outstanding performance guarantees were estimated at $4.3bn, with no material recorded liability. The maximum potential payment beyond estimated completion costs was not estimable.
- Other cited risks include project execution and cost overruns, client or partner payment/default risk, contract disputes, cyclical markets, government contract changes, foreign currency and political conditions, and tax audits. Management reported no material change in market-risk disclosures and said disclosure controls were effective.
Important facts for investors to verify
- Progress and recoverability of the Greater Gabbard claims, including the withheld $149m and future costs.
- Appeal developments and potential exposure from the post-quarter $358.5m lead-litigation verdict, including the collectability of indemnification.
- Whether backlog converts to profitable work, particularly given international concentration and the stated margin pressures.
- Cash conversion and working-capital needs as project activity changes, and the extent to which cash held overseas is available for corporate needs.
- Actual pension contributions, remaining convertible-note conversions, and exposure under performance guarantees.