FLUOR CORP annual report, FY2012

Fluor Corporation — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing also reports quarterly results, including the fourth quarter. Fluor provides global engineering, procurement, construction, maintenance and project-management services across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power.

Financial results and position

Metric	2012	2011
Revenue	$27.58 billion	$23.38 billion
Earnings before taxes	$733.5 million	$1.00 billion
Net earnings attributable to Fluor	$456.3 million	$593.7 million
Diluted EPS	$2.71	$3.40
Cash from operating activities	$628.4 million	$889.8 million
Capital expenditures	$254.7 million	$338.2 million
Year-end backlog	$38.2 billion	$39.5 billion

Revenue rose 18%, driven principally by Industrial & Infrastructure mining and metals activity and Oil & Gas growth. Earnings before taxes fell 27%, chiefly due to the $416 million Greater Gabbard project charge.
Fourth-quarter revenue was $7.02 billion; Fluor-attributable earnings were a loss of $4.4 million, or a diluted loss of $0.03 per share, compared with $153.1 million earnings and $0.90 diluted EPS in Q4 2011.
Consolidated cost of revenue was $26.69 billion in 2012, equivalent to an approximately 3.2% revenue-minus-cost-of-revenue margin, versus approximately 4.9% in 2011. Segment profit was $769.4 million, down from $1.04 billion.
Segment performance: Oil & Gas profit was $334.7 million, up from $275.6 million; Industrial & Infrastructure profit was $124.3 million, down from $389.3 million; Government profit was $149.7 million, modestly higher; Global Services profit was $177.6 million, up from $151.8 million; Power recorded a $16.9 million loss versus $81.1 million profit.
Year-end cash and cash equivalents were $2.15 billion, with marketable securities of $455 million. Working capital was $2.21 billion. Current assets were $6.09 billion and current liabilities $3.89 billion.
Total debt was approximately $541 million, including $496 million of 3.375% Senior Notes. Debt was 13.9% of total capitalization, versus 13.6% in 2011. Fluor reported $4.4 billion of committed and uncommitted credit lines, $1.1 billion of outstanding letters of credit and $3.3 billion of unused credit capacity; it reported compliance with debt covenants.
Dividends declared increased to $0.64 per share from $0.50; share repurchases totaled $389 million. The board authorized an additional 8 million shares for repurchase in February 2013.

Material changes and unusual items

The Greater Gabbard offshore wind project generated a $416 million pretax charge after an arbitration panel rejected Fluor’s claims for additional compensation. The charge included reversal of $278 million in previously recognized claim revenue, withheld liquidated damages and expected close-out costs. Fluor had funded $175 million of project cash outlays in 2012.
The Greater Gabbard client separately sought approximately $100 million in a counterclaim alleging defects; a hearing was scheduled for April 2013. Fluor said it did not consider a loss probable and recorded no charge for that claim.
2012 earnings included a $43 million pretax gain from selling an unconsolidated U.K. telecommunications interest and $43 million of tax benefits from tax-reserve reductions and an IRS settlement. The effective tax rate was 22.1%, compared with 30.3% in 2011.
Power results included $63 million of NuScale small modular reactor research and development expense, compared with $6.7 million in 2011.
Industrial & Infrastructure backlog declined to $15.5 billion from $19.6 billion, reflecting lower mining awards and cancellations of two mining projects totaling $2.0 billion. Oil & Gas backlog rose to $18.2 billion from $15.1 billion.
Beginning in 2013, operations and maintenance activities moved from Global Services to Industrial & Infrastructure; Global Services was to include expanded fabrication efforts and the developing Acqyre procurement business.

Outlook, risks and contingencies

Fluor expected to perform approximately 55% of year-end backlog during 2013. Backlog totaled $38.2 billion, approximately 75% of it outside the United States; the filing cautions that awards may be delayed and backlog can be canceled, deferred or changed.
Management stated that cash, operating cash generation and unused credit capacity were expected to support operating requirements for at least the next 12 months. This is not earnings or revenue guidance; the filing provides no clear numerical EPS or revenue forecast.
Management noted intense competition and margin pressure, a shift toward lower-margin construction work, and possible prolonged weakness in mining markets. Mining customers had deferred investment decisions amid cost escalation and softer commodity demand.
Government business faces risks from federal funding decisions, sequestration, contract termination and declining defense spending; management anticipated that Middle East and Afghanistan services could decrease over time.
Key broader risks include fixed-price cost overruns, schedule and performance guarantees, project claims and collections, international political and security conditions, foreign exchange, supplier and joint-venture performance, and changing tax or environmental requirements.
Outstanding performance guarantees were estimated at $3.8 billion; the recorded liability was immaterial. Other material exposures include the Greater Gabbard counterclaim and St. Joe Minerals litigation: an earlier jury verdict included $38.5 million compensatory and $320 million punitive damages, which Fluor was appealing and for which it had recorded no charge, citing its view that a loss was not probable.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.

Most important facts for investors to verify

Developments and cash exposure in the Greater Gabbard counterclaim and project close-out, including whether any additional charge is required.
Actual 2013 conversion of the $38.2 billion backlog into revenue, awards, cash collections and profit, particularly in mining and metals.
Whether operating cash flow recovers from the 2012 decline and whether working-capital needs, especially project advances and claims, affect liquidity.
Federal budget and task-order trends affecting Government segment awards, including LOGCAP IV and DOE contracts.
Progress and spending on NuScale, and whether Power segment economics improve.
Outcomes of St. Joe Minerals and other disputes, and whether guarantee or claim exposures exceed amounts accrued.