Fluor Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Financial statements are unaudited.
Business context and key financial metrics
Fluor provides engineering, procurement, construction and related services through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power segments. Amounts below are in U.S. dollars.
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $6.290 billion | $5.058 billion; up 24% |
| Earnings before taxes | $240.8 million | $241.1 million |
| Net earnings attributable to Fluor | $154.9 million | $139.7 million |
| Diluted EPS | $0.91 | $0.78 |
| Effective tax rate | 26.4% | 33.1% |
| Operating cash flow | $(47.1) million | $370.5 million |
| Cash and cash equivalents at quarter-end | $1.922 billion | $2.161 billion at Dec. 31, 2011 |
| Cash plus current and noncurrent marketable securities | $2.651 billion | $2.761 billion at Dec. 31, 2011 |
| Interest-bearing debt shown on balance sheet | About $532.8 million | About $532.9 million at Dec. 31, 2011 |
| Debt-to-capital ratio | 13.1% | 13.6% at Dec. 31, 2011 |
| Backlog | $42.453 billion | $37.186 billion at March 31, 2011 |
Current assets were $6.165 billion and current liabilities $3.904 billion at March 31, 2012. The resulting current ratio was approximately 1.58. Reported total segment profit was $253.3 million, versus $248.5 million; earnings before taxes were essentially flat. Cost of revenue increased 26% to $6.014 billion, faster than revenue, and the gross spread as a percentage of revenue declined to approximately 4.4% from 5.3%.
Material changes versus Q1 2011
- Revenue growth was led by Industrial & Infrastructure, particularly mining and metals, as well as Oil & Gas, Government and Global Services.
- Segment profit rose in Oil & Gas ($73.4 million versus $61.8 million), Industrial & Infrastructure ($103.3 million versus $92.1 million), Government ($35.3 million versus $34.1 million) and Global Services ($43.2 million versus $31.0 million). Power moved to a $1.9 million segment loss from $29.5 million profit.
- Industrial & Infrastructure revenue grew 40%, while its segment margin declined to 3.7% from 4.6%. Global Services margin improved to 10.1% from 8.2%; Oil & Gas margin was 3.6% versus 3.7%.
- Operating cash flow declined by $417.6 million year over year, primarily because working capital increased in Q1 2012 rather than declining as it did in Q1 2011. Fluor attributed the increase to project-related receivables and work in progress, partly offset by higher advance billings.
- The lower tax rate included a $16 million deferred tax benefit, primarily related to foreign taxes previously paid on certain unremitted South African earnings.
- New awards increased to $8.394 billion from $6.196 billion; ending backlog rose to $42.453 billion from $37.186 billion. Approximately 82% of Q1 awards and 79% of ending backlog related to projects outside the United States.
Outlook, management commentary and risks
- Liquidity: Management said cash generation, substantial cash and $2.5 billion of unused credit capacity were sufficient for operating requirements for at least the next 12 months. Total committed and uncommitted credit lines were $3.7 billion; $1.2 billion of letters of credit were outstanding. Fluor reported compliance with debt covenants.
- Margins and markets: Management said competitive conditions, particularly in Europe and other markets, were pressuring margins and expected that pressure to continue. A higher mix of construction work and customer-furnished materials can also reduce margins. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Project and segment outlook: Power faced weak demand for new generation; NuScale-related expenses were $10 million in the quarter. Government awards and backlog were lower year over year, partly because Q1 2011 included initial Portsmouth Project funding and greater advance funding for LOGCAP IV. Management noted continued opportunities in oil and gas, mining, emissions controls, renewables and related markets.
- Greater Gabbard dispute: Fluor had recorded $289 million of claim revenue for costs incurred, while the client withheld approximately $150 million in liquidated damages and filed a counterclaim alleging defects. The project was expected to be substantially complete by mid-2012, but dispute resolution was expected to continue afterward. An adverse outcome or failure to recover could result in a substantial earnings charge.
- Other legal matters: Fluor recorded a $13 million charge following an adverse embassy-project judgment and was considering an appeal. In the St. Joe Minerals matter, an earlier verdict totaled $358.5 million, including $320 million of punitive damages; Fluor had not accrued a charge because it believed a loss was not probable and was appealing. The filing says an unsuccessful outcome could require a substantial charge.
- Guarantees and claims: Outstanding performance guarantees were estimated at $6.9 billion, with no material liability recorded. Recognized claims against clients totaled $309 million, and eventual recoveries could differ materially from recorded amounts.
- Other obligations: Fluor expected to contribute approximately $30 million to $60 million to defined benefit pension plans in 2012, above minimum funding requirements. Remaining convertible notes were classified as short-term because the conversion trigger condition had been met; timing and amounts presented for conversion were uncertain.
- Principal risk factors: Project execution and cost overruns, client or partner payment and performance, award delays or cancellations, competitive pricing, litigation and claims recoverability, economic and political conditions, tax audits, foreign exchange, and availability of bonding, credit and insurance. Management reported no material change to the risk factors in its prior Form 10-K.
Most important facts for investors to verify
- Progress, final cost and arbitration outcome for Greater Gabbard, including recovery of the $289 million claim and the client’s $150 million withholding and counterclaim.
- Cash conversion and working-capital trends: whether receivables and contract work in progress are billed and collected as management expects.
- Project profitability and margin trends, especially the Power segment and Industrial & Infrastructure, and whether competitive pressure persists.
- Resolution of the St. Joe and embassy matters, and any change to recorded claims, contingencies or potential charges.
- Backlog conversion, new awards and international project exposure; backlog is subject to cancellations and scope changes.
- Liquidity and credit capacity, including guarantees, letters of credit, pension funding and any conversion of the remaining convertible notes.