Fluor Corporation — Q2 2012 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Fluor provides engineering, procurement, construction and related services through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $7.13 billion | $6.03 billion | $13.42 billion | $11.09 billion |
| Earnings before taxes | $288 million | $281 million | $529 million | $522 million |
| Net earnings attributable to Fluor | $161 million | $165 million | $316 million | $305 million |
| Diluted EPS | $0.95 | $0.94 | $1.86 | $1.72 |
| Operating cash flow | Not separately reported for the quarter in the supplied text | $82 million | $428 million |
- Q2 revenue increased 18%; first-half revenue increased 21%, chiefly from mining and metals growth in Industrial & Infrastructure and higher Oil & Gas activity. Fluor-attributable earnings fell 3% in Q2 but rose 4% for the first half. Diluted EPS increased as average diluted shares declined, partly reflecting repurchases.
- Q2 segment profit was $286.7 million versus $280.3 million; first-half segment profit was $540.0 million versus $528.8 million. Segment profit is a company-defined measure and is not consolidated net income.
- Margins were mixed: Oil & Gas Q2/first-half margins were 3.7%/3.6%; Industrial & Infrastructure 3.6%/3.6%; Government 4.6%/4.4%; Global Services 12.1%/11.1%. Power recorded losses of $6.6 million for Q2 and $8.5 million for the first half. Management cited competitive pricing and a greater mix of lower-margin construction and customer-furnished-material work as pressure on margins.
- Effective tax rates were 33.2% for Q2 and 30.1% for the first half, versus 31.9% and 32.5% in 2011. The first-half rate benefited from a $16 million deferred tax benefit, primarily related to foreign taxes previously paid on certain South African earnings.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $1.80 billion, down from $2.16 billion at year-end; current and noncurrent marketable securities totaled $746 million. Cash plus marketable securities was approximately $2.55 billion, versus $2.76 billion at December 31, 2011. Some cash and assets relate to VIEs and are restricted for those entities’ use.
- First-half operating cash flow of $82 million was substantially below $428 million in 2011, primarily due to greater working-capital needs during project execution, including changes in advance billings. Fluor reported working-capital movements as normal project activity, not significant collection issues.
- Debt included $513.7 million of long-term debt and $19.2 million of current convertible notes. The debt-to-capital ratio was 13.0%, compared with 13.6% at year-end; Fluor said it was in compliance with debt covenants.
- Committed and uncommitted credit lines totaled $3.8 billion, with $2.5 billion unused; $1.2 billion of letters of credit was outstanding. Management said cash, operating cash generation and unused capacity were sufficient for operating needs for at least the next 12 months.
- First-half investing cash use was $230 million, including $120 million of capital expenditures. Financing cash use was $215 million, including $133 million of share repurchases and $49 million of dividends. The quarterly dividend declared was $0.16 per share, up from $0.125.
Business trends, outlook and risks
- Consolidated backlog was $43.0 billion at June 30, up 7% from $40.3 billion a year earlier. First-half awards were $15.7 billion versus $15.9 billion; Q2 awards were $7.3 billion versus $9.7 billion. Approximately 82% of backlog was outside the United States. The filing cautions that backlog may be cancelled or adjusted.
- Oil & Gas backlog rose 30% year over year to $19.5 billion. Industrial & Infrastructure backlog was $19.5 billion, down from $21.4 billion. Government backlog declined to $505 million from $1.1 billion, mainly reflecting the run-off of LOGCAP IV advance funding. Power backlog rose to $1.7 billion from $744 million.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected competitive conditions and margin pressure to continue, while describing improving Oil & Gas market demand and weak demand for new power generation. It identified potential opportunities in gas-fired generation, renewables, transmission and emissions-compliance work.
- Power results were weighed down by completed or near-completed projects and NuScale research and development costs of $15 million in Q2 and $25 million in the first half. Management said NuScale’s technology may provide future benefits.
- Greater Gabbard is a significant dispute: Fluor had recorded $283 million of claim revenue for costs incurred, while the client withheld approximately $150 million in liquidated damages and filed a counterclaim concerning alleged defects. Arbitration hearings had commenced; an adverse outcome or failure to recover could result in a substantial earnings charge.
- Fluor recorded a $13 million first-quarter charge after an adverse judgment on an embassy-project claim and planned to appeal. In the St. Joe matter, a 2011 jury award included $38.5 million compensatory and $320 million punitive damages; Fluor had not accrued a loss because it believed reversal was probable. An unsuccessful appeal or indemnity recovery could cause a substantial charge.
- Recognized client claims totaled $303 million at June 30; ultimate recoveries may differ materially. Performance guarantees were estimated at $6.5 billion, although the recorded liability was not material. Other risks include project execution and cost overruns, client or partner payment/default, litigation, market cyclicality, tax audits and international political, currency and security conditions.
Most important facts for investors to verify
- Progress and recoverability of the $283 million Greater Gabbard claim, the $150 million withheld and the client’s counterclaim.
- Whether weak operating cash flow and working-capital demands persist as projects advance and customer advances are worked off.
- Backlog conversion, new-award pace and margin quality, particularly in mining and metals, Government and Power.
- Outcomes of the embassy claim appeal and St. Joe litigation, including potential exposure and indemnification.
- Availability of credit and letter-of-credit capacity, and any restrictions on cash held in VIEs or overseas.