Fluor Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Unaudited results. Fluor provides engineering, procurement, construction and related services through Energy Solutions, Urban Solutions and Mission Solutions, among other businesses.
Financial performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $3.939B | $3.299B | $7.692B | $6.422B |
| Gross profit | $198M | $115M | $160M | $237M |
| Operating profit (loss) | $94M | $106M | $(47)M | $201M |
| Net earnings (loss) attributable to Fluor | $61M | $66M | $(46)M | $114M |
| EPS attributable to common stockholders, diluted | $0.35 | $0.38 | $(0.46) | $0.66 |
| Operating cash flow | Not presented separately for the quarter | $(99)M | $(133)M |
- Revenue rose about 19% in Q2 and 20% in H1, primarily as execution ramped up on recently awarded projects. Approximate gross margin was 5.0% in Q2 versus 3.5% a year earlier, and 2.1% in H1 versus 3.7%.
- Q2 segment profit was $191M, or 4.8% of revenue, compared with $108M, or 3.3%, in Q2 2022. H1 segment profit was $176M, or 2.3%, compared with $223M, or 3.5%.
- Q2 net interest income was $37M, compared with net interest expense of $1M a year earlier. H1 net interest income was $78M versus net interest expense of $10M, reflecting higher returns on cash and savings after redeeming the 2023 Notes.
- H1 operating cash outflow improved from $133M to $99M but remained negative, reflecting working-capital increases on large projects and estimated funding of $37M on loss projects. Cash and cash equivalents were $2.262B at June 30, down from $2.439B at year-end; cash plus marketable securities totaled about $2.3B.
Liquidity, debt and backlog
- Total debt was approximately $996M: $17M current and $979M long-term. Fluor had no credit-facility borrowings and reported $776M of available borrowing capacity. Its $1.8B credit facility matures in February 2026; $451M of letters of credit was outstanding under it, with another $930M under uncommitted lines.
- Fluor redeemed its remaining 2023 Notes for $140M in January 2023. The $381M carrying value of 2024 Notes remains a maturity to address. Management said it could use existing liquidity and/or a new debt offering and might act as early as Q3 2023, subject to market conditions. Stork sale proceeds were no longer expected to meaningfully support the 2024 Notes plan.
- Management said anticipated operating cash generation, unused credit capacity and cash were sufficient for operating needs for at least the next 12 months. The credit facility includes a $1.1B minimum liquidity threshold and may require collateral if ratings fall to specified levels.
- Backlog was $25.483B at June 30, down from $26.049B at December 31, 2022, but up from $19.519B at June 30, 2022. H1 new awards were $6.944B versus $5.476B a year earlier. Remaining unsatisfied performance obligations were $24.386B. Backlog can be cancelled, deferred or adjusted and is not the same measure as RUPO.
Material changes and notable items
- Energy Solutions revenue and profit increased with project execution and $74M of favorable forecast adjustments on two projects; results also included a $34M charge for cost growth and schedule extension on an upstream project. H1 segment profit included a $22M favorable foreign-currency remeasurement effect.
- Urban Solutions improved year over year, but H1 results included a $59M charge for LAX Automated People Mover rework, schedule effects and system integration testing. Mission Solutions H1 results included a $30M charge for government-directed changes and delays on a weapons-facility project.
- Fluor completed the AMECO South America sale in March, completing its AMECO divestiture. The sale generated a $60M negative earnings impact, including $35M related to currency translation; total proceeds from AMECO divestitures were $144M.
- NuScale generated a $52M H1 segment loss, compared with $29M a year earlier. Fluor owned approximately 56% as of June 30. H1 Other segment results also reflected the AMECO sale impact.
- H1 net loss contrasted with 2022 net earnings. The comparison also reflects a $63M impairment reversal recorded in H1 2022, which was absent in 2023. H1 2023 included an $86M foreign-currency loss at the consolidated operating line.
- The H1 effective tax rate was 302.7%, driven in part by a $75M net valuation-allowance impact on only $31M of pretax earnings. Q2 effective tax rate was 47.9%.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided in the supplied filing text. Management said it was on track to meet its goal of net-zero Scope 1 and 2 absolute emissions by the end of 2023.
- H1 backlog included $1.6B of loss projects, which Fluor said would affect future operating cash flow. Management cited project cost and schedule estimation, subcontractor and supplier performance, client payment timing, new awards and project deferrals among key business risks.
- Outstanding performance guarantees had a stated maximum potential payment amount of $12B, representing estimated remaining cost of work; the recorded performance-guarantee obligation was not material. The filing also reported $57M of future funding commitments to unconsolidated VIEs and $428M of investments in a loss position, primarily provisions for anticipated losses on two legacy infrastructure projects.
- In the Santos Australia litigation, a court-appointed panel recommended judgment for Santos on claims it valued at AUD $790M and for Fluor on another claim valued by Santos at approximately AUD $700M. The panel said a contract liability cap of approximately AUD $236M did not apply. Its report was nonbinding pending court adoption; Fluor challenged the process and recommendations. The adoption hearing was scheduled for February 2024.
- The SEC investigation concerning 2019 project charges remained unresolved; the DOJ closed its investigation in May 2023 and said it did not intend to bring charges. Fluor had recorded an accrual but said the ultimate outcome could not be predicted. Other disclosed disputes include Sadara, Barrick and an NTTA matter; the filing states possible losses may exceed accruals and generally cannot be estimated clearly.
Important facts for investors to verify
- Whether project execution, margins and cash conversion improve, particularly given negative H1 operating cash flow and $1.6B of loss-project backlog.
- Progress on funding or refinancing the 2024 Notes, and compliance with credit-facility liquidity and other covenants.
- Updates to major project forecasts and charges, including LAX, the weapons-facility and upstream projects, as well as the recognition and collectability of claims and unapproved change orders. Fluor reported $586M of revenue tied to such claims and change orders at June 30.
- Developments in the Santos case, the SEC investigation and other significant litigation, including whether any outcome changes the estimated exposure.
- Backlog conversion, cancellations or scope changes, and the funding status of $2.9B of unfunded Mission Solutions government backlog.