Fluor Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 3, 2017. Figures below are in U.S. dollars unless otherwise noted.
Business context and results
Fluor provides engineering, procurement, construction, maintenance and government services through four segments: Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government; and Diversified Services.
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $4.716B | $4.856B | $9.552B | $9.280B |
| Net earnings (loss) attributable to Fluor | ($24M) | $102M | $37M | $206M |
| Diluted earnings (loss) per share | ($0.17) | $0.72 | $0.26 | $1.46 |
| Operating cash flow | Not stated for quarter | $428M | $91M |
Approximate gross margin, calculated as revenue less cost of revenue divided by revenue, was 0.7% in Q2 2017 versus 5.1% in Q2 2016, and 1.9% in H1 2017 versus 5.4% in H1 2016. The 2017 results include substantial project cost charges described below.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $1.820B; current and noncurrent marketable securities totaled $325M. Combined cash and securities were approximately $2.145B, versus approximately $2.105B at year-end 2016. Cash held by consolidated VIEs was $523M and may not be readily available for general purposes.
- Current assets were $5.614B and current liabilities $3.733B. Current borrowings and other borrowings were $36M; long-term debt due after one year was $1.560B.
- Six-month cash flow: operating activities provided $428M; investing activities used $373M; financing activities used $123M. Cash declined $31M to $1.820B.
- Committed credit facilities total $3.5B and mature in February 2022. Borrowings and letters of credit outstanding under committed and uncommitted lines totaled $1.8B. The company said it could use up to $1.75B of the committed facilities for revolving loans and was in compliance with debt covenants.
- Management said cash, operating cash generation and unused credit capacity were sufficient for operating needs for at least the next 12 months.
Material changes and operating trends
- Q2 revenue fell 3% year over year, while H1 revenue rose 3%. Fluor reported a Q2 attributable net loss and a 82% decrease in H1 attributable earnings.
- Industrial, Infrastructure & Power recorded pre-tax charges of $194M in Q2 and $219M in H1 after revised cost forecasts for three fixed-price gas-fired power projects in the southeastern U.S. Charges reduced diluted EPS by $0.89 and $0.99, respectively. The segment reported a $168M Q2 loss and a $175M H1 loss.
- Energy, Chemicals & Mining H1 revenue declined 6% and segment profit declined 30%, reflecting projects nearing completion, delayed project starts, and a shift from higher-margin engineering to lower-margin construction work.
- Government H1 revenue increased 12% and segment profit increased 25%. Diversified Services H1 revenue increased 3%, but segment profit declined 4%.
- New awards were $3.2B in Q2 and $5.5B in H1, versus $6.4B and $11.1B in the comparable 2016 periods. Backlog was $37.6B at June 30, down from $47.3B a year earlier; the filing cites project adjustments and cancellations, including V.C. Summer, the suspended Canadian LNG project and a shorter Magnox contract term, as well as work performed exceeding awards.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the supplied filing text. Management noted depressed commodity prices continued to affect award timing and project execution, while reporting renewed mining-project interest in bauxite, copper and gold.
- Westinghouse filed for Chapter 11 in March 2017. Fluor reported $59M due for pre-petition V.C. Summer services and $14M for Plant Vogtle services, and expected those amounts to be recoverable. The V.C. Summer owner cancelled the project on July 31, 2017; Fluor was demobilizing. Fluor continued Plant Vogtle work at the owner's request, while discussions on project scope remained ongoing. Plant Vogtle backlog of $3.0B had not been adjusted for potential scope changes.
- Fluor Australia is defending a Santos lawsuit seeking approximately AUD $1.47B. The company considered the claims without merit and did not believe a loss was probable; it recorded no charge.
- Outstanding performance guarantees had an estimated maximum potential payment of $14B; the recorded liability was not material. The filing says amounts potentially payable above estimated costs to complete are not estimable.
- Fluor had recorded $75M of claim revenue for incurred costs as of June 30, versus $61M at year-end 2016, and $41M of disputed supplier back charges at both dates. Recovery depends on the underlying claims and back charges.
- 2017 tax benefits included a worthless-stock deduction for an insolvent foreign subsidiary; the unusually low results also magnified the effect on effective tax rates. Tax audits could produce outcomes materially different from recorded reserves.
- Management cited risks including project execution and cost overruns, cancellations and scope changes, commodity-market weakness, customer and partner credit, litigation, foreign exchange, and access to credit, bonding and letters of credit.
Important facts for investors to verify
- Whether cost forecasts and execution on the three fixed-price power projects stabilize, and whether further charges are required.
- Plant Vogtle’s ultimate scope, schedule, Fluor receivables and backlog treatment following Westinghouse’s bankruptcy; confirm the financial effects of the V.C. Summer cancellation.
- Backlog conversion and award trends, particularly in Energy, Chemicals & Mining and Government, and the impact of further cancellations or deferrals.
- Cash availability after considering VIE restrictions, advance-billing needs, guarantees, and outstanding letters of credit.
- Recoverability and timing of the Santos dispute, project claims and disputed back charges, and any developments in tax audits.