Fluor Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Figures are unaudited and in U.S. dollars; amounts are in millions except per-share data. Fluor provides engineering, procurement and construction management services through Energy Solutions, Urban Solutions and Mission Solutions, among other businesses.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,963 | $3,612 | $11,654 | $10,034 |
| Gross profit (loss) | $251 | $(15) | $411 | $222 |
| Operating profit (loss) | $218 | $(11) | $172 | $190 |
| Net earnings (loss), consolidated | $181 | $(24) | $119 | $105 |
| Net earnings attributable to Fluor | $206 | $22 | $161 | $136 |
| Net earnings available to common stockholders | $169 | $12 | $105 | $107 |
| Diluted EPS available to common stockholders | $1.15 | $0.08 | $0.72 | $0.74 |
Gross margin was approximately 6.3% in Q3 2023 versus negative 0.4% in Q3 2022; nine-month gross margin was approximately 3.5% versus 2.2%. Operating margin was approximately 5.5% for Q3 2023 versus negative 0.3%; for the nine-month periods it was approximately 1.5% versus 1.9%. Fluor-attributable earnings exceeded consolidated earnings because losses attributable to noncontrolling interests were deducted in arriving at consolidated net earnings. Q3 common earnings also reflect a $27 million make-whole payment on preferred-stock conversion.
- Segment results: Q3 segment profit was $276 (7.0% margin), compared with $31 (0.9%) a year earlier. Energy Solutions profit was $177; Urban Solutions $66; Mission Solutions $38; and Other a $5 loss. Nine-month segment profit was $452, up from $253.
- Cash flow: Operating cash flow was $(96) for the first nine months, versus $(15) a year earlier, mainly reflecting working-capital increases on large projects and higher tax payments. Investing cash flow was $(46); financing cash flow was $131. Cash and cash equivalents ended at $2,421, down from $2,439 at year-end 2022.
- Liquidity: Cash and marketable securities totaled approximately $2.6 billion. Management said liquidity, expected operating cash generation and unused credit capacity were sufficient for at least the next 12 months. However, $563 of cash was held by consolidated VIEs and was not necessarily available for general purposes. The $1.8 billion credit facility had no borrowings and $797 of borrowing capacity; $422 of letters of credit were outstanding under it.
- Debt: Current and long-term debt totaled approximately $1.44 billion, versus $1.13 billion at December 31, 2022. In August, Fluor issued $575 of 1.125% convertible notes due 2029, receiving $560 net, and spent $73 on capped calls. It repurchased $115 of 2024 notes and said it expected to begin defeasance of the remaining 2024 notes in December 2023. The credit facility has a $1.5 billion minimum-liquidity covenant, potentially reducible to $1.0 billion after debt repayment; a ratings downgrade could trigger collateral requirements.
- Backlog and obligations: Backlog was $26.0 billion, essentially flat from $26.05 billion at year-end 2022; nine-month new awards were $11.92 billion, down from $15.22 billion. Remaining unsatisfied performance obligations were $24.08 billion. Backlog included $1.4 billion for loss projects; $82 million was funded on loss projects during the nine-month period. Performance guarantees had a stated maximum potential payment amount of $16 billion, although the recorded performance-guarantee obligation was not material.
Material changes and notable items
- Revenue rose approximately 10% in Q3 and 16% for the nine-month period, driven by execution ramp-ups on recently awarded projects, partly offset by work nearing completion. Q3 profit improvement also reflected recovery entitlements on fixed-price projects and mining-project incentive fees.
- Energy Solutions’ nine-month profit included a $58 million charge for cost growth on a legacy upstream project. Urban Solutions included a $59 million nine-month charge for LAX Automated People Mover rework and schedule impacts. Mission Solutions recorded a $30 million nine-month charge for delays on a weapons-facility project; Fluor is assessing recovery of costs it attributes to client-directed changes.
- The AMECO South America sale was completed in March. Fluor recognized a $60 million negative earnings impact, including $35 million of foreign-currency translation effects.
- NuScale generated a $71 million segment loss for the nine months; Fluor reported an approximately 55% ownership interest. Stork recorded $25 million of segment profit over the period.
- The effective tax rate was 30.4% for Q3 and 59.1% for the nine-month period. The nine-month rate included a substantial valuation-allowance effect.
- Fluor converted all outstanding convertible preferred stock in September. The conversion ended preferred dividends and included a $27 million make-whole payment. Common shares outstanding rose to approximately 170.4 million from 142.3 million at year-end 2022.
Outlook, risks and contingencies
No specific full-year revenue, earnings or EPS guidance is provided in the filing. Management expects fourth-quarter cash receipts from certain project claims and disputes, a large joint-venture distribution and potentially a tax refund. Fluor said it was on track to meet its goal of net-zero Scope 1 and 2 absolute greenhouse-gas emissions by the end of 2023. The filing cautions that backlog may be canceled, deferred or changed and that estimates on complex projects can differ from actual costs and schedules.
- Litigation: In the Santos matter in Australia, a court-appointed panel recommended judgment for Santos on claims it valued at AUD 790 million and for Fluor on another claim valued by Santos at approximately AUD 700 million. The panel’s report is nonbinding unless adopted by the court; a hearing was scheduled for February 2024. Fluor disputes the recommendations, including their treatment of a contractual liability cap of approximately AUD 236 million.
- NTTA claim: The North Texas Tollway Authority’s expert report estimated $227 million in repair damages for retaining walls. Fluor has asserted, among other things, indemnity claims against subcontractors.
- Other disputes: Sadara arbitration resulted in a $14 million Q3 charge for expected net settlement, subject to requested clarifications. A Barrick arbitration award was generally in Fluor/TECHINT’s favor; Fluor recorded a $12 million Q3 gain and expected to recognize a further $11 million of interest-related gain in Q4.
- Regulatory matter: The DOJ closed its investigation into 2019 project charges without intending to bring charges. Fluor settled the SEC investigation in September 2023 and agreed to a $15 million civil penalty; previously established reserves funded the settlement, which had no material Q3 impact.
- Other exposures and risks: Future funding commitments to unconsolidated VIEs were $57 million. Recorded revenue related to claims and unapproved change orders was $648 million at September 30, up from $498 million at year-end. Principal stated risks include project cost and schedule overruns, client or subcontractor performance, award levels, working-capital needs, litigation, market conditions, foreign exchange, and credit availability. The filing also identifies capped-call counterparty risk and potential unmitigated dilution above the $68.48 capped-call limit.
Most important facts for investors to verify
- Whether improved segment profitability is repeatable, given the contribution from project recovery entitlements, incentive fees and favorable dispute outcomes.
- Whether negative operating cash flow and working-capital demands improve, and whether expected Q4 claim, joint-venture and tax receipts are realized.
- Progress on the remaining 2024 notes and compliance with liquidity and other credit-facility covenants.
- Project cost and schedule developments, particularly the LAX and weapons-facility projects, loss-project backlog and disputed change-order revenue.
- Developments in the Santos and NTTA matters, including potential losses and the extent of recovery from partners or subcontractors.
- Backlog conversion and award trends, including the amount of unfunded government backlog and possible cancellations or deferrals.