Fluor Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Fluor provides engineering, procurement, construction, government services, and maintenance services; the period includes Stork from its March 1, 2016 acquisition.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4.767B | $4.385B | $14.047B | $13.743B |
| Gross profit (revenue less cost of revenue) | $37M (0.8%) | $251M (5.7%) | $541M (3.9%) | $842M (6.1%) |
| Continuing earnings attributable to Fluor | $4.8M | $176.3M | $210.9M | $468.9M |
| Diluted continuing EPS | $0.03 | $1.21 | $1.50 | $3.17 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $452M | $570M |
Q3 2016 had a $2.7M pretax loss from continuing operations, but a $20.1M income tax benefit resulted in $17.4M consolidated continuing earnings, of which $4.8M was attributable to Fluor. Nine-month net earnings attributable to Fluor were $210.9M. Dividends declared were $0.21 per share in each quarter and $0.63 per share year to date.
Operating cash flow less capital expenditures was approximately $287M for the first nine months of 2016 (a simple calculation, not a company-defined measure). Cash and cash equivalents were $1.780B at September 30, down from $1.950B at year-end 2015; cash plus current and noncurrent marketable securities was $2.062B. Current assets were $5.742B against current liabilities of $3.876B.
Balance-sheet debt included $133.7M of current revolver and other borrowings and $1.556B of long-term debt, approximately $1.689B combined. This compares with $986.6M of long-term debt and no current revolving/other borrowings at year-end 2015. Fluor issued €500M of 1.75% senior notes in March, used proceeds in part to repay acquisition-related borrowings, and reported compliance with debt covenants. It had $6.0B of committed and uncommitted credit lines, with $1.9B of borrowings and letters of credit outstanding and stated unused capacity of $4.1B.
Changes, segments, and backlog
- Revenue rose 9% in Q3 and 2% year to date, but earnings fell sharply. The principal cause was $241M of Q3 and $265M of nine-month pretax charges for revised estimated costs on a U.S. petrochemical project; the charges reduced diluted EPS by $1.10 and $1.20, respectively.
- Energy, Chemicals & Mining revenue fell 17% in Q3 and 20% year to date; the segment recorded a $59.7M Q3 loss, compared with $208.2M profit a year earlier. Lower mining and metals activity, completed or winding-down projects, and the petrochemical cost revisions contributed.
- Industrial, Infrastructure & Power revenue increased 89% in Q3 and 72% year to date, with segment profit of $28.4M and $91.7M, respectively, supported by power project execution. Government revenue increased 3% in Q3 and 6% year to date; nine-month segment profit rose 6%. Maintenance, Modification & Asset Integrity revenue nearly doubled in Q3, largely reflecting Stork, while segment profit declined 7% in Q3 and 5% year to date and margins contracted.
- New awards were $7.0B in Q3 and $18.1B year to date. Backlog was $44.3B at September 30, versus $41.7B a year earlier. The quarter included a net $5.36B of backlog adjustments and cancellations, primarily reflecting suspension of an LNG project, as well as scope changes and currency effects. Backlog is not guaranteed against cancellation or scope reduction.
- Stork contributed $863M of revenue and $9M of earnings since acquisition through September 30. Purchase accounting remained provisional. Fluor invested $412M in the CFHI joint venture during the nine months and expected another $78M investment in September 2017.
Outlook, risks, and unusual items
- The filing gives no numerical revenue or earnings guidance. Management said commodity price declines had affected award timing and execution on some existing projects, while describing Energy, Chemicals & Mining as positioned for new activity.
- Management said operating cash generation, substantial cash, and unused credit capacity were expected to support requirements for at least the next 12 months. Working capital outlays increased, particularly in receivables and contract work in progress.
- The 2016 tax rate benefited from a favorable IRS audit resolution for 2009–2013 and an increased research tax credit. Results also face exposure to global economic and commodity cycles, project cost overruns and delays, client or partner performance and payment, foreign exchange, litigation, tax audits, and acquisition integration.
- Performance guarantees could require up to an estimated $17.3B of future payments, representing remaining third-party work costs; the recorded liability was not material. Amounts payable beyond estimated completion costs were not estimable. Fluor reported $56M of recognized claim revenue in contract work in progress, up from $30M at year-end, and said recovery was probable.
- Management did not expect open litigation and other ordinary-course matters to have a material adverse effect on consolidated financial position or results. The filing also notes ongoing government-contract audits and investigations. The 2015 comparison included a $68M pretax gain on a partial Spanish subsidiary sale and a $5M after-tax discontinued-operations loss; neither recurred in 2016.
Important facts for investors to verify
- Project status, remaining cost estimates, and potential further charges on the U.S. petrochemical project.
- Progress on the suspended LNG project, backlog adjustments, and conversion of backlog and new awards into revenue and cash.
- Stork integration, final purchase-price allocation, and the acquired business’s sustainable margins and cash contribution.
- Working-capital trends, availability of cash held in consolidated joint ventures, and actual liquidity under credit facilities.
- Exposure and recoverability relating to performance guarantees, recognized claims, government-contract reviews, and other contingencies.