Fluor Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 2, 2018. Financial statements are unaudited. Comparisons are with the corresponding 2017 periods unless noted. 2018 results reflect adoption of ASC 606; prior periods were not restated.
Financial results and position
- Q2 revenue: $4.884 billion, up 4% from $4.716 billion. First-half revenue: $9.708 billion, up 2% from $9.552 billion.
- Q2 net earnings attributable to Fluor: $115 million, versus a $24 million loss; diluted EPS was $0.81 versus a $0.17 loss. First-half attributable earnings: $97 million, versus $37 million; diluted EPS was $0.69 versus $0.26.
- Cost of revenue: $4.674 billion in Q2 and $9.440 billion in the first half. Revenue less cost of revenue was $210 million in Q2 and $268 million year to date; these amounts precede corporate expenses, interest and taxes.
- Operating cash flow: cash used was $133 million in the first half, versus $428 million provided in 2017. Investing activities provided $84 million; financing activities used $40 million. Cash and cash equivalents declined $122 million to $1.682 billion.
- Liquidity: cash plus current marketable securities was $1.783 billion at June 30, compared with $1.965 billion at year-end; total current assets were $5.456 billion and current liabilities $3.752 billion. Reported cash included $729 million held by consolidated VIEs, not necessarily readily available for general use.
- Debt: short-term borrowings were $81 million and long-term debt $1.575 billion. Approximately $50 million of commercial paper was outstanding at a weighted-average rate of 2.43%. The company reported compliance with debt covenants. Its $3.5 billion of committed revolving facilities had $1.6 billion of letters of credit and borrowings outstanding, a combined amount rather than debt alone.
- Backlog and obligations: consolidated backlog was $29.3 billion, down from $37.6 billion a year earlier. Remaining unsatisfied performance obligations were $26.9 billion, including $14.4 billion expected to be satisfied within one year.
Material changes and segment performance
- Q2 segment profit was $194 million, versus $15 million; first-half segment profit was $246 million, versus $148 million. Improvements reflect, in part, substantially lower project cost-growth charges than in 2017.
- Energy & Chemicals: Q2 revenue declined 6% to $2.015 billion and segment profit fell to $97 million from $124 million. A $67 million pre-tax charge for estimated cost growth on a fixed-price downstream project weighed on both Q2 and first-half results.
- Mining, Industrial, Infrastructure & Power: Q2 revenue rose 13% to $1.340 billion; segment profit was $16 million, compared with a $165 million loss. First-half revenue declined 12% to $2.250 billion, and the segment recorded a $128 million loss. A fixed-price gas-fired power plant project generated pre-tax charges of $16 million in Q2 and $142 million year to date.
- Government: Q2 revenue rose 16% to $863 million and first-half revenue rose 45% to $2.191 billion, driven largely by Puerto Rico power restoration and hurricane-relief work. Segment profit increased to $51 million in Q2 and $123 million year to date.
- Diversified Services: revenue increased 4% in Q2 and 8% year to date, but segment profit declined 20% and 19%, respectively, reflecting a North American operations-and-maintenance cancellation and weaker Canadian equipment contributions.
- New awards were $5.4 billion in Q2 and $7.9 billion in the first half, compared with $3.2 billion and $5.5 billion in 2017. Backlog declined chiefly following removal of the Westinghouse nuclear project and because work performed exceeded award activity.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, expected operating cash generation and unused credit capacity should support operating needs for at least the next 12 months.
- Management attributed first-half operating cash outflow mainly to weaker working-capital inflows. Contract assets rose with Puerto Rico project execution, while contract liabilities declined in Energy & Chemicals as projects progressed.
- ASC 606 adoption reduced retained earnings by $339 million at January 1, 2018. For the six months, adoption increased reported revenue by $32 million and Fluor-attributable net earnings by $24 million. The filing describes the main accounting change as generally treating engineering and construction contracts as a single performance obligation.
- Q2 and first-half attributable earnings were reduced by after-tax project cost-growth charges of $80 million and $176 million, respectively. The Tax Act’s effects remained provisional; foreign tax rates and inability to offset losses across jurisdictions adversely affected 2018 effective tax rates.
- Fluor estimated maximum potential future payments under performance guarantees at $13 billion; the recorded guarantee liability was not material. The amount represents remaining third-party work and is not a forecast of likely payments.
- Significant matters include Santos’s approximately AUD $1.47 billion claim concerning an Australian project, which Fluor disputes and for which it recorded no charge because it did not consider a loss probable; and a shareholder securities-law class action filed in May 2018. The company said it did not expect open matters to materially adversely affect consolidated financial position or results.
- Other risks include fixed-price project execution and cost overruns, cancellations or deferrals, collection and working-capital volatility, foreign exchange, litigation, joint-venture exposure, and reliance on letters of credit and bonding capacity. The filing reported no material change in risk factors or market-risk disclosures.
Important facts for investors to verify
- Progress, final cost estimates and remaining exposure on the downstream and gas-fired power projects responsible for substantial charges.
- Whether operating cash flow and working capital improve, including collection of contract assets and use of customer advances.
- Backlog conversion, cancellations and new awards, particularly given backlog’s year-over-year decline and the distinction between backlog and ASC 606 obligations.
- Availability of cash held in VIEs and the capacity remaining under credit facilities after letters of credit and borrowings.
- Developments in the Santos dispute, shareholder litigation, Westinghouse-related receivables, and the potential calls on performance guarantees.
- Final accounting for Tax Act provisions and the effect of ASC 606 on comparability with prior periods.