Fluor Corporation — Q1 2015 Form 10-Q
Business context and period: Engineering, procurement, construction and related services company. Unaudited results cover the three months ended March 31, 2015; comparisons are with Q1 2014. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $4,548.6 | $5,384.6 | Down 16% |
| Cost of revenue | $4,251.2 | $5,072.3 | Down 16% |
| Earnings before taxes | $248.9 | $271.5 | Down 8% |
| Net earnings attributable to Fluor | $144.1 | $149.1 | Down 3% |
| Diluted EPS | $0.96 | $0.92 | Up 4% |
| Cash provided by operating activities | $39.3 | $186.7 | Down $147.4 |
Revenue less cost of revenue was $297.5 million, or approximately 6.5% of revenue, versus $312.3 million, or 5.8%, in Q1 2014. The effective tax rate was 33.5%, compared with 28.8%. Lower diluted share count, mainly from repurchases, supported the EPS increase despite lower attributable earnings.
Segments and backlog
| Segment | Revenue 2015 / 2014 | Profit (loss) 2015 / 2014 |
|---|---|---|
| Oil & Gas | $2,471.6 / $2,782.8 | $183.3 / $139.1 |
| Industrial & Infrastructure | $1,080.2 / $1,615.7 | $71.1 / $97.2 |
| Government | $646.0 / $593.2 | $14.8 / $12.5 |
| Global Services | $129.7 / $142.0 | $15.3 / $20.7 |
| Power | $221.1 / $250.9 | ($8.6) / ($1.4) |
Oil & Gas profit rose on stronger downstream project contributions, favorable forecast revisions and a shift toward higher-margin engineering work; its reported segment margin increased to 7.4% from 5.0%. Industrial & Infrastructure revenue and profit fell with mining and metals activity. Government results improved, partly offset by lower LOGCAP IV activity. Power’s loss widened, including higher NuScale expenses.
Consolidated new awards were $4.4 billion, versus $10.7 billion. Backlog ended at $41.2 billion, up from $40.2 billion a year earlier, but was reduced by approximately $1.6 billion from U.S. dollar strength. Mining and metals backlog weakened; Oil & Gas and Government backlog increased.
Financial position, cash flow and debt
- Cash and cash equivalents were $1.81 billion, down from $1.99 billion at year-end; cash plus current and noncurrent marketable securities totaled approximately $2.21 billion, versus $2.44 billion.
- Total debt was approximately $1.02 billion, comprising $27.7 million current borrowings and $992.2 million long-term debt. Debt-to-capital was 24.9%, versus 24.7% at December 31, 2014. The company reported compliance with debt covenants.
- Current assets were $5.38 billion and current liabilities $2.82 billion. Management cited $3.9 billion of unused credit capacity and stated available liquidity was sufficient for operating needs for at least 12 months.
- Operating cash flow included $306.5 million of outflows related to discontinued operations, principally the January 2015 payment settling St. Joe Minerals/Doe Run claims. Investing activities used $18.1 million; financing activities used $154.0 million, including $111.7 million of share repurchases and $32.4 million of dividends.
Outlook, risks and unusual items
- No specific revenue or EPS forecast is provided in the supplied filing text. Management noted that lower oil prices could affect Oil & Gas projects and award timing; mining customers continued to defer capital investment, with timing of recovery uncertain. Power demand remained relatively weak.
- Management described a highly competitive environment and margin pressure. Other identified risks include project execution, cost overruns, cancellations or scope changes, client and partner credit/performance, litigation, foreign exchange, tax audits and access to bonding or credit.
- The company expects to contribute up to $100 million to defined benefit pension plans in 2015. The terminated U.S. pension plan was expected to settle in late 2015, subject to regulatory approval; approximately $271 million of unrecognized actuarial losses could be recognized as expense on settlement, with the final amount dependent on settlement terms and market conditions.
- Outstanding performance guarantees had a maximum potential payment amount estimated at $15.5 billion; the company said amounts payable beyond estimated completion costs were not estimable and the recorded liability was not material.
- The $306 million St. Joe/Doe Run settlement payment was made in January 2015. Fluor said it would continue seeking indemnification and did not expect material charges from remaining lawsuits, although a range of possible losses was not estimable.
- Foreign currency translation reduced reported comprehensive income; net earnings impact from currency exposure was not significant in the quarter, according to management.
Important facts for investors to verify
- Whether the $4.4 billion of new awards can sustain backlog and revenue as mining activity declines and oil-price uncertainty affects project timing.
- How Oil & Gas margin gains from project mix and forecast revisions develop, and whether they are repeatable.
- The eventual cash and earnings impact of the U.S. pension-plan settlement and the expected 2015 contributions.
- Resolution of remaining St. Joe/Doe Run claims and Fluor’s ability to recover amounts under indemnification rights.
- Actual exposure under performance guarantees, project claims and government-contract audits, and the availability of credit and bonding capacity.
- The source and sustainability of operating cash flow, particularly excluding the discontinued-operations settlement outflow.