Fluor Corporation — Q2 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2010. Fluor provides engineering, procurement, construction and related services through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $5,152 | $5,293 | $10,071 | $11,090 |
| Earnings attributable to Fluor | $157 | $169 | $294 | $374 |
| Diluted EPS | $0.87 | $0.93 | $1.63 | $2.05 |
| Consolidated net earnings | $178 | $176 | $332 | $398 |
| Earnings before taxes | $259 | $278 | $492 | $607 |
| Cost of revenue | $4,868 | $4,976 | $9,527 | $10,424 |
- Revenue fell about 3% in Q2 and 9% in the first half year over year. Earnings attributable to Fluor declined about 7% and 21%, respectively. Q2 consolidated net earnings increased slightly, while a larger share was attributable to noncontrolling interests.
- The revenue less cost-of-revenue spread was approximately 5.5% of revenue in Q2 2010, versus 6.0% a year earlier; for the first half it was approximately 5.4%, versus 6.0%. This is before corporate expenses and other items.
- Operating cash flow was negative $227 million in the first half, compared with positive $385 million in 2009, primarily reflecting working-capital growth to support project execution. Investing activities provided $152 million; financing activities used $146 million. Cash decreased $250 million.
- At June 30, cash and equivalents were $1.44 billion; current and noncurrent marketable securities totaled $648 million. Combined, these were approximately $2.09 billion, down from $2.63 billion at year-end 2009.
- Total debt was approximately $117 million: $100 million of convertible notes classified as current and $18 million of long-term debt. Debt-to-capitalization was 3.2%, down from 3.7% at year-end. Fluor reported compliance with debt covenants.
- Total current assets were $5.20 billion and current liabilities $3.18 billion. The company reported $3.1 billion in committed and uncommitted credit lines, $1.1 billion of letters of credit outstanding and $2.0 billion of unused credit capacity.
Material changes and segment performance
- Oil & Gas: First-half revenue fell 39% and segment profit fell 50% year over year as large projects neared completion and awards slowed. Backlog was $10.2 billion, down from $15.8 billion a year earlier.
- Industrial & Infrastructure: First-half revenue increased 41% and segment profit 29%, primarily on mining and metals project growth. Backlog rose to $16.1 billion from $9.8 billion. Margins declined amid a greater share of lower-margin construction and mining work.
- Government: First-half revenue increased 69%, chiefly from Army LOGCAP IV work in Afghanistan; segment profit increased 15%. Margins were lower than in 2009, which included a favorable $15.3 million contract adjustment award.
- Global Services: First-half revenue declined 13% and segment profit 19%, reflecting weaker equipment activity, including Iraq-related work, and economic conditions. Q2 profit improved, partly due to Gulf Coast oil-spill cleanup work.
- Power: First-half revenue increased 11% and segment profit 67%, supported by project progress and substantial completion at the Oak Grove coal-fired project. Results included additional cost provisions of $51 million in Q2 and $63 million year to date for a Georgia gas-fired project; no recovery on client change notices was assumed.
- Consolidated new awards were $12.7 billion in the first half, versus $12.3 billion in 2009. Backlog was $30.2 billion at June 30, versus $30.9 billion a year earlier; approximately 72% was for projects outside the United States.
Outlook, risks and unusual items
- Management said cash generation and unused credit capacity were expected to fund operating requirements for at least the next 12 months. The filing does not provide a specific consolidated revenue or earnings forecast.
- Management noted possible higher Oil & Gas award activity in the second half of 2010, particularly in several markets outside the U.S., but timing of recovery remained uncertain. Competitive bidding and a shift toward lower-margin construction work were expected to continue pressuring margins.
- Recognized claims against clients totaled $287 million at June 30, primarily in contract work in progress; actual recoveries could differ materially. Fluor recorded $202 million of claim revenue on the Greater Gabbard offshore wind project for costs incurred, with further dispute-related costs expected and no profit recognized pending resolution.
- A California infrastructure joint-venture client filed for Chapter 11. The client had withheld $51 million in liquidated damages and drawn $14.8 million on letters of credit; Fluor believed the amounts would be recovered and had not reserved its share. The joint venture’s claims process was subject to the bankruptcy stay.
- Outstanding performance guarantees were estimated at $2.9 billion, although the recorded liability was not material. Potential payments beyond estimated contract-completion costs were not estimable.
- Other material risk exposures identified include project execution delays and cost overruns, cancellations or scope changes, client and partner financial viability, litigation and claims, tax audits, global economic and political conditions, and availability of credit, bonding and letters of credit.
- The effective tax rate was 31.2% for Q2 and 32.5% for the first half, lower than the comparable 2009 rates, mainly due to a favorable tax-audit settlement and earnings attributable to noncontrolling interests.
Important facts for investors to verify
- Whether the negative first-half operating cash flow and working-capital investment convert to cash as projects progress and billings are resolved.
- Actual recoveries and additional costs on Greater Gabbard, the California infrastructure joint venture, embassy claims and the Georgia power project.
- Oil & Gas award trends, overall backlog conversion, and whether new awards offset execution of existing projects.
- Terms, timing and share dilution associated with future conversions of the 1.5% convertible notes.
- Potential exposure under performance guarantees and other commitments, including the distinction between their stated maximums and amounts ultimately payable.