Fluor Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. The filing was signed December 10, 2020. Comparisons are with the corresponding 2019 periods unless noted.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.803 billion | $4.629 billion | $12.013 billion | $12.909 billion |
| Net earnings (loss) attributable to Fluor | $19.3 million | $(743.1) million | $(271.6) million | $(1,226.0) million |
| Diluted EPS | $0.14 | $(5.30) | $(1.93) | $(8.76) |
| Operating cash flow | Not stated separately for the quarter | $144.2 million | $66.9 million |
- Q3 revenue declined about 18%; nine-month revenue declined about 7%. Q3 continuing-operations earnings attributable to Flu were $19.1 million; nine-month continuing-operations loss attributable to Flu was $178.9 million. The nine-month total loss also includes a $92.7 million discontinued-operations loss.
- Cost of revenue was $3.670 billion in Q3 and $11.750 billion for nine months. Implied gross margin was approximately 3.5% and 2.2%, respectively, compared with approximately 2.0% and negative 2.1% in the prior-year periods.
- Total segment profit was $129.4 million in Q3 (3.4% margin), versus $78.8 million (1.7%); for nine months it was $242.0 million (2.0%), versus a $274.8 million segment loss (negative 2.1%). Improvement chiefly reflects large prior-year project charges, not uniformly stronger activity.
- Cash and cash equivalents were $2.094 billion at September 30, 2020, including $560 million held by consolidated VIEs and not necessarily available for general use; marketable securities were $17.5 million. Cash increased $96.6 million from year-end 2019. Nine-month investing cash flow was $(56.7) million and financing cash flow was $46.0 million.
- Long-term debt was $1.677 billion and short-term borrowings were $42.5 million. No committed revolver borrowings were drawn; covenant-limited borrowing capacity was approximately $654 million. Current assets were $5.010 billion and current liabilities $3.545 billion.
- Backlog was $27.774 billion at September 30, down from $31.934 billion at year-end 2019. Nine-month new awards were $8.131 billion versus $9.517 billion. Remaining unsatisfied performance obligations were $25.782 billion.
Changes versus prior period
- Quarterly earnings returned to positive territory as prior-year project charges and impairment costs did not recur at comparable levels. No material Q3 impairment, restructuring or exit-cost expense was recorded; nine-month impairment, restructuring and exit costs totaled $302.7 million.
- Nine-month results included $297.6 million of continuing-operations impairment expense, including $168.6 million of Diversified Services goodwill, $26.7 million of Stork customer relationships, $86.1 million of Energy & Chemicals equity-method investments, and $16.3 million of IT assets. The company also recorded a $100 million AMECO held-for-sale impairment in discontinued operations.
- Corporate G&A was $68.1 million in Q3 versus $11.2 million, including $30.4 million of foreign-exchange losses and $18.7 million of internal-review legal and accounting fees. Nine-month G&A fell to $93.8 million from $119.7 million.
- Operating cash flow improved year over year, while capital expenditures decreased to $80.8 million from $140.1 million. The company suspended its dividend effective April 29, 2020; $28.7 million was paid in the first nine months, compared with $88.7 million.
Outlook, management commentary and risks
- Management stated that cash, expected operating cash generation and unused credit capacity should be sufficient for operating requirements for at least the next 12 months, while warning that future losses could reduce committed credit availability. No specific revenue or earnings guidance was provided.
- COVID-19, lower commodity prices, client financial stress and government budget constraints caused project delays, deferrals, suspensions and reduced demand. Management said the scale and duration of these effects remained uncertain. Annual goodwill and indefinite-lived intangible impairment testing was planned for Q4 2020.
- The company expects to complete the AMECO equipment-business sale in the first half of 2021. It sold its Jamaica AMECO business for $18 million in August 2020 and recognized a $1 million loss. Fluor decided to retain its government business, which is reported in continuing operations.
- Credit facilities mature in February 2022 and include a maximum debt-to-capitalization ratio of 0.6 to 1.0. Outstanding letters of credit were $384 million under committed facilities and $792 million under uncommitted facilities. Delayed filings led to amended lender reporting deadlines; the company said filing this 10-Q and providing other information would satisfy interim 2020 reporting obligations. Earlier senior-note reporting defaults were satisfied after prior filings.
- Disclosure controls and procedures were reported ineffective, reflecting material weaknesses in internal control over financial reporting. Management said additional analyses and procedures supported the conclusion that these interim financial statements fairly present the company’s financial position and results under GAAP.
- Significant contingencies include shareholder securities and derivative actions; claims by Santos (approximately AUD $1.47 billion), Sadara counterclaims (approximately $574 million), and Barrick arbitration claims (at least $250 million); and litigation over termination of the Purple Line project. Management said it did not believe losses were probable in the cited claims, but outcomes are uncertain.
- The SEC is investigating projects associated with Q2 2019 charges, and the DOJ issued a subpoena seeking related project, accounting, reporting and governance information. Fluor said it is cooperating. Other stated risks include project cost overruns, backlog cancellations or deferrals, litigation, credit availability and ongoing control remediation.
- Outstanding performance guarantees could require payments estimated at up to $15 billion, representing remaining cost to complete guaranteed work; the recorded guarantee obligation was not material. Unconsolidated VIE funding commitments were $77 million, including a $26 million COOEC Fluor commitment due at year-end.
Most important facts for investors to verify
- Progress and effectiveness of remediation for the material weaknesses and whether future filings are timely.
- Available revolver capacity, covenant headroom, lender compliance and the liquidity actually available after excluding restricted or project-related cash.
- Backlog quality, new-award trends and exposure to cancellations, project delays, lump-sum cost overruns and client credit deterioration.
- Assumptions behind impairment valuations and whether further impairment or credit-loss reserves are needed as the pandemic and commodity-market impacts evolve.
- Developments in the SEC/DOJ inquiries and major project disputes, including potential financial exposure and the status of the AMECO sale.