Fluor Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited results; comparisons are with the corresponding 2009 periods unless stated otherwise.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $5.51 billion | $5.42 billion | $15.58 billion | $16.51 billion |
| Gross profit (revenue less cost of revenue) | $61.8 million | $312.3 million | $606.1 million | $978.5 million |
| Earnings (loss) attributable to Fluor | $(53.6) million | $162.1 million | $240.4 million | $536.2 million |
| Diluted EPS | $(0.30) | $0.89 | $1.33 | $2.93 |
Q3 gross margin was approximately 1.1%, versus 5.8% a year earlier; nine-month gross margin was approximately 3.9%, versus 5.9%. Q3 and nine-month results included a $163 million Greater Gabbard charge and a $95 million charge on a completed California infrastructure joint venture project. The nine-month period also included $63 million of earlier-2010 provisions for added costs on a Georgia power project. The Q3 effective tax rate was 220.9%, primarily because the Greater Gabbard foreign loss generated no tax benefit; the nine-month rate was 41.6%.
Cash flow and liquidity: Operating cash flow was $210 million for the first nine months, down from $546 million, primarily reflecting increased working capital for project execution. Investing activities provided $232 million, compared with $864 million used in 2009; financing activities used $189 million. Cash and equivalents were $1.98 billion at quarter-end; cash plus current and noncurrent marketable securities was about $2.5 billion, versus $2.6 billion at year-end 2009. Fluor reported $3.3 billion of committed and uncommitted credit lines, $2.3 billion of unused capacity, and said available liquidity was sufficient for at least the next 12 months.
Debt and capital: Debt-to-capital was 3.2%, down from 3.7% at December 31, 2009. Balance-sheet debt included $99.2 million of convertible notes classified as current and $17.8 million of long-term debt. Fluor reported compliance with its debt covenants. The $1.5 billion senior credit facility matures in 2011. The company paid $67.6 million in dividends in the first nine months and repurchased $17.1 million of stock.
Material changes and business trends
- Quarterly revenue edged up, but nine-month revenue declined 6%. Oil & Gas revenue fell 39% year to date amid completed projects, slower awards and competitive conditions; segment profit fell 54%.
- Industrial & Infrastructure revenue rose 59% year to date, driven by mining and metals, but the segment recorded a $67.3 million year-to-date loss, largely due to the two major project charges. Its backlog grew to $17.3 billion from $9.7 billion a year earlier.
- Government revenue rose 60% year to date, primarily on U.S. Army LOGCAP IV work in Afghanistan. Global Services profit improved from the prior year, which included a $45 million receivable provision, while revenue remained lower. Power year-to-date profit increased 28%, partly offset by the Georgia project provision.
- New awards were $7.6 billion for the quarter and $20.3 billion for the first nine months, versus $2.9 billion and $15.1 billion, respectively, in 2009. Backlog reached $33.0 billion, up 18% from September 2009; 71% was outside the United States.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cited initial signs of Oil & Gas recovery, particularly in some international markets, but said timing remains uncertain. Competitive pressure on margins is expected to continue; client capital spending remains affected by the global recession.
- Greater Gabbard, a $1.8 billion fixed-price offshore wind project, faced delivery, installation, repair and weather-related delays and cost overruns. Fluor recorded a $163 million charge but continued to claim additional compensation; it had recognized $171 million of claim revenue for costs incurred and stated recovery was probable. Additional dispute-related costs were expected.
- For the California infrastructure joint venture, a bankruptcy court ruled that senior lenders’ lien had priority over the joint venture’s mechanic’s lien. Fluor recorded a $95 million charge after concluding recovery of related costs and other amounts was no longer probable.
- Outstanding performance guarantees were estimated at $3.5 billion; the recorded liability was not material. Recognized client claims were $204 million at quarter-end and may ultimately differ materially from amounts realized. The filing also describes embassy-project claims and other litigation, while management did not expect the proceedings, individually or collectively, to materially adversely affect the company after recorded provisions.
- Other disclosed risks include project execution and cost overruns, cancellations and delayed awards, client or partner financial capacity, disputes and claims collection, tax examinations, political and security conditions, and access to credit, bonding and letters of credit. Fluor reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track Greater Gabbard cost forecasts, schedule, claim recoverability and any further charges.
- Monitor outcomes and recoveries relating to the California joint venture bankruptcy and other significant claims.
- Assess working-capital needs, cash conversion and whether liquidity remains adequate as project activity and backlog evolve.
- Evaluate backlog quality, cancellations, project mix and margin pressure, especially in Oil & Gas and fixed-price work.
- Review conversion or repayment of the remaining convertible notes, the 2011 credit-facility maturity, and exposure under guarantees and joint ventures.