Business context and reporting period
Fluor Corporation’s Form 10-Q covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. The filing was signed November 12, 2020, after reporting delays. Fluor provides engineering, procurement, construction and related services across Energy & Chemicals, Mining & Industrial, Infrastructure & Power, Government, Diversified Services and Other. The company retained its Government business, previously classified as discontinued operations; the planned sale of AMECO remains classified as discontinued operations, with completion expected in the first half of 2021.
Financial results and position
Amounts below are in U.S. dollars; income statement and cash-flow amounts are in millions unless otherwise stated.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $4,091 | $4,146 | $8,210 | $8,280 |
| Segment profit (loss), non-GAAP | $61 | $(393) | $113 | $(354) |
| Income (loss) from continuing operations before taxes | $11 | $(512) | $(218) | $(541) |
| Net income (loss) attributable to Fluor | $(25) | $(414) | $(291) | $(483) |
| Basic and diluted EPS | $(0.18) | $(2.95) | $(2.07) | $(3.45) |
Revenue declined approximately 1% year over year in both periods. Q2 continuing-operations pre-tax income was positive, but Fluor recorded a $25 million net loss attributable to the company. First-half results include $303 million of impairment, restructuring and exit costs in continuing operations; the first quarter also included a $100 million impairment of AMECO assets held for sale. The effective tax rate on continuing operations was 285.7% in Q2 and 16.4% for the first half; the quarterly rate was affected by foreign taxes and valuation allowances, while first-half results benefited from CARES Act-related tax effects.
Operating cash flow was $64 million for the first half, versus $91 million in 2019, primarily reflecting working-capital outflows compared with inflows a year earlier. Investing cash flow was $(60) million and financing cash flow was $18 million. Capital expenditures were $59 million. Cash and cash equivalents totaled $1.970 billion at June 30, down from $1.997 billion at year-end; marketable securities were $13 million. The filing does not provide a free-cash-flow measure.
At June 30, current assets were $5.027 billion and current liabilities were $3.605 billion. Long-term debt was $1.655 billion and short-term borrowings were $53 million. Shareholders’ equity was $1.092 billion and total equity was $1.231 billion. Cash held by consolidated VIEs was $547 million and may not be available for general purposes. Committed facilities totaled $3.5 billion, with $463 million of letters of credit outstanding; covenant limits allowed approximately $632 million of additional borrowing, with no facility borrowings drawn. Another $880 million of letters of credit was outstanding under uncommitted lines.
Total backlog was $29.0 billion at June 30, down from $31.9 billion at December 31, 2019; remaining unsatisfied performance obligations were $27.2 billion. First-half new awards were $6.4 billion, compared with $5.8 billion a year earlier. Backlog includes estimates and can be affected by cancellations, deferrals and scope changes.
Material changes versus the prior comparable period
- Q2 segment profit improved substantially from the prior-year loss, when major project forecast revisions and cost-growth charges weighed on Energy & Chemicals and Infrastructure & Power. Fluor reported no similar material charges in those segments in Q2 2020.
- First-half impairment and credit charges included $169 million of Diversified Services goodwill impairment, $27 million for Stork customer relationships, $86 million for Energy & Chemicals equity-method investments, $16 million for IT assets, and $55 million of expected credit losses on certain joint-venture clients. Fluor also recorded $52 million of project positions for potential COVID-19 delays and cost growth.
- AMECO’s first-half discontinued-operations loss was $84 million, including the $100 million asset impairment. Its sale is expected in the first half of 2021.
- Fluor suspended its dividend effective April 29, 2020. It paid $29 million in dividends in the first half, versus $59 million in the prior-year period.
- Backlog declined by about 9% from year-end. The Purple Line project was terminated in June 2020 and later canceled in the third quarter; the project had supported higher Infrastructure & Power revenue.
Outlook, management commentary, risks and contingencies
Management gave no quantified earnings, revenue or cash-flow guidance. It stated that cash, expected operating cash generation and unused credit capacity should support operating requirements for at least the next 12 months, while noting it may pursue additional liquidity. Fluor warned that COVID-19, lower commodity prices, client financial distress, project delays or cancellations, and government budget constraints could reduce demand, impair assets and pressure cash flow and results.
Management cited the possibility of contract cost overruns, disputes, counterparty failures, reduced awards and backlog, and constraints on credit or letter-of-credit capacity. At June 30, 52% of backlog consisted of lump-sum contracts. Estimated potential payments under outstanding performance guarantees were $16 billion, representing remaining cost to complete; Fluor said the recorded performance-guarantee obligation was not material, but amounts potentially payable above estimated completion costs were not estimable.
Material matters include a securities class action and related derivative suits, which Fluor said it did not believe would probably result in a loss; a Santos claim seeking approximately AUD $1.47 billion; Sadara counterclaims of approximately $574 million alongside Fluor affiliates’ approximately $100 million unpaid-invoice claim; and Barrick arbitration claims of at least $250 million. Fluor disputes these claims and had not recorded charges for the specified counterclaims. The State of Maryland is also suing over termination of the Purple Line public-private partnership. The SEC and DOJ are investigating and seeking information related to 2019 project charges and certain accounting, reporting and governance matters; Fluor said it is cooperating.
Disclosure controls and procedures were reported as ineffective because of material weaknesses in internal control over financial reporting. Management said it performed additional procedures and concluded the statements fairly present the company’s financial position and results in conformity with GAAP. Late filings triggered notices of default under the Senior Notes indenture; prior filing requirements were satisfied after the 2019 Form 10-K and Q1 2020 Form 10-Q were filed, and this Q2 filing was due to satisfy the subsequent reporting requirement by December 22, 2020. Revolving-facility reporting deadlines were extended to November 30 and December 31, 2020.
Important facts for investors to verify
- Progress in remediating the material weaknesses in internal controls, and whether subsequent filings are timely and reliable.
- Cash generation, access to committed and uncommitted credit, covenant headroom, and the availability of cash held in VIEs.
- Backlog conversion, award trends, cancellations and the effects of lump-sum contract exposure, including the Purple Line termination.
- Further impairments, client credit losses and project cost-growth exposures as COVID-19 and market conditions evolve.
- Outcomes and potential financial effects of the SEC/DOJ inquiries, litigation, arbitrations and guarantees.
- Timing and proceeds of the AMECO sale, and whether or when the Board may reinstate a dividend.