Fluor Corporation — Q1 2019 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Fluor provides engineering, procurement, construction and related services across four reportable segments. Segment reporting was recast to move commercial nuclear and NuScale activities into Government.
Key financial results
- Revenue: $4.19 billion, down 13% from $4.82 billion. Lower Energy & Chemicals, Government and Diversified Services revenue was partly offset by growth in Mining, Industrial, Infrastructure & Power.
- Earnings: Gross profit was $61.7 million (about 1.5% of revenue), versus $57.8 million (about 1.2%) in Q1 2018. Fluor-attributable net loss was $58.4 million, or $0.42 per diluted share, compared with a $17.6 million loss, or $0.13 per share. Pretax loss was $32.4 million; income tax expense was $10.9 million.
- Segment profit: $46.6 million versus $52.3 million. Energy & Chemicals profit fell to $19.4 million from $105.7 million; Government to $16.6 million from $48.2 million; Diversified Services to $10.2 million from $18.8 million. Mining, Industrial, Infrastructure & Power recorded $0.4 million profit versus a $120.4 million loss.
- Cash flow: Operating activities used $17.5 million, improved from $136.0 million used in Q1 2018. Investing provided $67.8 million and financing used $29.8 million. Cash increased $41.0 million to $1.81 billion; cash plus current marketable securities was about $1.90 billion.
- Liquidity and debt: Current assets were $5.24 billion and current liabilities $3.53 billion. Long-term debt was $1.65 billion, with $35.9 million in short-term borrowings. $1.5 billion of borrowings and letters of credit was outstanding under committed and uncommitted lines. Fluor reported compliance with debt covenants and believes liquidity is adequate for at least the next 12 months.
- Margins and project pipeline: Segment margins weakened in Energy & Chemicals, Government and Diversified Services; Mining, Industrial, Infrastructure & Power improved year over year. New awards were $3.4 billion versus $2.5 billion. Consolidated backlog was $39.3 billion versus $29.1 billion a year earlier; remaining unsatisfied performance obligations were $36.9 billion.
Material changes and management commentary
- Q1 2019 results included $27.4 million in pretax restructuring and exit costs, primarily severance related to Stork. Management expected approximately $50 million of restructuring costs in 2019, including Q1 charges, and said additional activities could be approved.
- Project forecast revisions and close-out items materially affected results. Energy & Chemicals recorded $53 million of charges for estimated offshore project cost growth and $31 million related to customer close-out matters. Mining, Industrial, Infrastructure & Power recorded $26 million of charges for estimated cost growth on fixed-price gas-fired power projects, compared with $125 million in Q1 2018.
- Management attributed revenue declines to reduced or completed project activity, including completion of Puerto Rico power restoration work, and lower activity in several Energy & Chemicals projects. It cited higher execution activity in mining and infrastructure as a partial offset. No specific full-year revenue or earnings guidance is provided in the filing text.
- Fluor adopted lease accounting standard ASC 842 on January 1, 2019, recording $313.8 million of right-of-use assets and $324.6 million of lease liabilities at March 31. Adoption increased retained earnings by about $21 million and did not materially affect operating results or cash flows.
Risks, contingencies and unusual items
- A customer dispute involving a gas-fired power project concerns approximately $110 million of costs allegedly incurred by the customer; the customer withheld invoices and drew on a letter of credit. Fluor disputes the claims and did not consider additional losses probable beyond recorded reserves.
- Fluor reported $108 million of aged and disputed receivables on a Middle East chemicals project and is pursuing collection. It also reported $175 million of claim revenue in contract assets, which management believes is probable of recovery.
- A client, Santos, seeks approximately AUD $1.47 billion in damages relating to an Australian project. Fluor disputes the claims and said it did not believe a loss was probable; no charge was recorded.
- Outstanding performance guarantees had a stated maximum potential amount of $19 billion, although the recorded liability was not material and actual amounts payable beyond estimated completion costs were not estimable.
- Other exposures include shareholder securities and derivative lawsuits, Westinghouse-related receivables, government-contract audits, and future funding commitments of $81 million for unconsolidated VIEs. Fluor said it did not expect open matters to materially adversely affect consolidated financial position or results of operations, but outcomes remain uncertain.
- Principal disclosed risks include project cost and schedule estimation, disputes and collections, award and backlog changes, client or partner performance, foreign exchange, market cyclicality, government-contract requirements, and credit or letter-of-credit capacity.
Most important facts for investors to verify
- Whether further project cost revisions, especially on offshore and fixed-price power projects, will affect margins, cash flow or reserves.
- Collection and resolution prospects for the $110 million power-project dispute, $108 million disputed receivables and $175 million of claim revenue.
- Progress against the Stork restructuring plan, including total costs and expected savings; the filing does not quantify expected savings.
- Conversion of the $39.3 billion backlog and $36.9 billion of performance obligations into revenue and cash, considering possible cancellations, deferrals and scope changes.
- Availability of liquidity after accounting for VIE-held cash, project advances, letters of credit and the substantial performance-guarantee exposure.