Fluor Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Fluor provides engineering, procurement, construction, project management and diversified services. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4.658 billion | $4.942 billion | $14.366 billion | $14.494 billion |
| Earnings before taxes | $146.5 million | $165.4 million | $321.1 million | $234.9 million |
| Net earnings attributable to Fluor | $77.3 million | $94.5 million | $174.6 million | $131.0 million |
| Diluted EPS | $0.55 | $0.67 | $1.23 | $0.93 |
| Declared dividends per share | $0.21 | $0.21 | $0.63 | $0.63 |
- For the first nine months, operating cash flow was a use of $11 million, versus $551 million provided in 2017, primarily reflecting lower working-capital inflows. Investing activities used $72 million; financing activities used $8 million.
- Cash and cash equivalents were $1.680 billion at September 30, down from $1.804 billion at year-end 2017. Cash plus marketable securities was approximately $1.9 billion. Cash held by consolidated VIEs was $511 million and may not be readily available for general purposes.
- Current assets were $5.584 billion and current liabilities $3.662 billion. Short-term borrowings were $57 million and long-term debt was $1.667 billion.
- Fluor issued $600 million of 4.250% senior notes due 2028 and redeemed $500 million of 3.375% notes, paying a $3 million make-whole premium. About $25 million of commercial paper outstanding at quarter-end was repaid in October. The company reported compliance with debt covenants.
Material changes and segment results
- Q3 revenue decreased 6%; nine-month revenue decreased slightly. Q3 attributable earnings fell year over year, while nine-month attributable earnings increased.
- Energy & Chemicals revenue and segment profit declined. Nine-month segment profit was $253 million, down from $308 million; fixed-price downstream project forecast revisions generated $113 million of nine-month pre-tax charges.
- Mining, Industrial, Infrastructure & Power reported nine-month segment loss of $27 million, improved from a $131 million loss in 2017. Results included a $125 million pre-tax gain from a U.K. joint-venture sale and $177 million of charges for estimated cost growth on a fixed-price gas-fired power plant project. Management warned that missed schedule milestones could cause significant additional charges.
- Government segment revenue rose 31% and profit rose 97% for the first nine months, supported by FEMA work and Puerto Rico power restoration. Diversified Services nine-month profit declined 24%, in part due to cancellation of a large North American operations and maintenance project.
- New awards were $17.6 billion for the first nine months, versus $9.3 billion in 2017. Backlog was $34.9 billion at September 30, versus $32.9 billion a year earlier. Remaining unsatisfied performance obligations were $32.8 billion; cancellations, deferrals and scope changes remain possible.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management stated that cash, expected operating cash generation and unused credit capacity should support operating requirements for at least the next 12 months.
- Combined after-tax charges for project forecast revisions were $70 million in Q3 and $244 million for the first nine months; the U.K. joint-venture sale contributed a $97 million after-tax gain in both periods.
- Fluor adopted ASC 606 on January 1, 2018. Adoption reduced opening retained earnings by $339 million and increased reported nine-month revenue by $84 million and Fluor-attributable earnings by $62 million. Prior-year figures were not restated, limiting comparability.
- The effective tax rate was 34.5% for Q3 and 33.0% for the first nine months. Tax Act accounting remained provisional; higher foreign tax rates and inability to offset losses across jurisdictions adversely affected rates.
- Other notable matters include a $19 million Q3 partial pension-settlement charge and a U.K. pension buy-in; expected 2018 pension contributions were $45–$50 million. A shareholder securities action and derivative actions are pending. Santos seeks approximately AUD $1.47 billion in damages; Fluor disputes the claims and said it did not consider a loss probable.
- Outstanding performance guarantees had a stated maximum potential payment amount of $15 billion, but the recorded liability was not material; amounts potentially payable above estimated completion costs were not estimable. Principal business risks include fixed-price project cost and schedule overruns, contract awards and cancellations, customer or partner performance, litigation, foreign exchange and government-contract requirements.
Most important facts for investors to verify
- Progress and remaining cost exposure on the fixed-price downstream and gas-fired power plant projects, including whether schedule milestones are met.
- Cash conversion and working-capital trends, particularly collections and contract liabilities, and the availability of VIE-held cash.
- Backlog quality, new awards and potential cancellations or deferrals; distinguish backlog from remaining performance obligations.
- Resolution and potential financial exposure of the Santos claim, shareholder actions and Westinghouse-related receivables.
- Final tax accounting and the ongoing comparability effects of ASC 606 adoption.