Fluor Corporation — 2011 Form 10-K
Business context and reporting period. Fluor provides engineering, procurement, construction, maintenance and project-management services globally across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. This summary covers the fiscal year ended December 31, 2011; quarterly figures below identify fourth-quarter results where relevant. Financial amounts are in U.S. dollars.
Key financial results and liquidity
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Revenue | $23.38 billion | $20.85 billion | Up 12%; record annual revenue |
| Earnings before taxes | $1.002 billion | $560 million | Up 79%, primarily reflecting fewer project charges |
| Net earnings attributable to Fluor | $594 million | $357 million | Up 66% |
| Diluted EPS | $3.40 | $1.98 | 2011 included a $60 million Greater Gabbard charge; 2010 included larger project charges and a tax benefit |
| Cash from operating activities | $890 million | $551 million | Improved with higher earnings and favorable working-capital movements |
| Cash and cash equivalents | $2.16 billion | $2.13 billion | At year-end |
| Working capital | $2.04 billion | $2.04 billion | Current assets $5.88 billion; current liabilities $3.84 billion |
| Total debt | About $533 million | About $114 million | Debt-to-capital ratio rose to 13.6% from 3.2%, mainly after the 2011 notes issuance |
| Backlog | $39.48 billion | $34.91 billion | Up 13%; approximately 63% expected to be performed in 2012 |
Consolidated gross profit was approximately $1.15 billion, or 4.9% of revenue; earnings before taxes were 4.3% of revenue and net earnings attributable to Fluor were 2.5%. The effective tax rate was 30.3%, versus 21.2% in 2010. Cash and current and noncurrent marketable securities totaled approximately $2.76 billion. Fluor reported $3.8 billion in committed and uncommitted credit lines, with $2.6 billion of unused capacity, and stated that available liquidity was sufficient for at least the next 12 months. It was in compliance with debt covenants.
Operating cash flow improved despite a $361 million net cash outlay for Greater Gabbard project execution. Investing activities used $436 million, including $338 million of capital expenditures and $27 million for acquisitions. Financing activities used $396 million, including $640 million of stock repurchases and $88 million of dividends, partly offset by proceeds from the $500 million senior-notes issuance. The quarterly dividend was increased from $0.125 to $0.16 per share in February 2012.
Material changes versus 2010
- Industrial & Infrastructure revenue rose 41% to $9.70 billion and segment profit improved to $389 million from a $170 million loss, mainly reflecting mining and metals growth and the much smaller Greater Gabbard and California project charges.
- Oil & Gas revenue increased 3% to $7.96 billion, but segment profit fell 20% to $276 million; margin declined to 3.5% from 4.4%, in part due to a shift toward lower-margin construction work and customer-furnished materials.
- Government revenue grew 12% to $3.40 billion, largely on increased LOGCAP IV activity in Afghanistan. Segment profit was $146 million, up slightly; margin eased to 4.3% from 4.7%.
- Global Services revenue increased 5% to $1.58 billion and segment profit rose 14% to $152 million; margin improved to 9.6% from 8.8%.
- Power revenue fell 56% to $743 million and segment profit fell 53% to $81 million as major projects neared completion. New awards increased backlog to $1.84 billion from $972 million.
- New awards were $26.90 billion, slightly below $27.36 billion in 2010. Backlog growth was led by Industrial & Infrastructure and Oil & Gas; 78% of year-end backlog related to projects outside the United States.
Fourth-quarter 2011 revenue was $6.25 billion, earnings before taxes were $249 million, net earnings attributable to Fluor were $153 million and diluted EPS was $0.90. Fourth-quarter 2010 diluted EPS was $0.65, amid significant project charges and a tax benefit.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific revenue, earnings or EPS guidance. Management described a highly competitive environment with continued margin pressure, potentially more lump-sum work, and lower typical margins where construction work and customer-furnished materials make up a larger share. It cited opportunities in mining and metals, oil and gas, government services, gas-fired power, renewables and emissions compliance.
- Greater Gabbard: Fluor recorded $60 million of additional 2011 charges after $343 million of charges in 2010 on the $1.8 billion U.K. offshore wind project. It had recognized $265 million of claim revenue for costs incurred and considered recovery of incurred and future costs probable. The client had withheld approximately $150 million in liquidated damages; recovery is disputed and expected to be pursued in arbitration. Substantial completion was expected by second-quarter 2012, but claim resolution could continue after completion.
- Other project and tax items: 2010 included a $95 million charge on a completed California infrastructure joint venture and a $91 million charge on a Georgia gas-fired power project. A $152 million tax benefit in 2010 related to a worthless-stock deduction following foreign-subsidiary tax restructuring. The 2011 effective tax rate benefited from releases of previously unrecognized tax benefits.
- St. Joe Minerals litigation: A 2011 jury verdict awarded $38.5 million in compensatory and economic damages and $320 million in punitive damages. Fluor appealed, believed an adverse loss was not probable, and recorded no charge. It also cited indemnification rights; an unsuccessful appeal or recovery could require a substantial earnings charge.
- Other exposures: Recognized client claims totaled $298 million at year-end, compared with $209 million in 2010; realized amounts may differ. Outstanding performance guarantees were estimated at $4.6 billion, with no material carrying liability recorded. Risks also include fixed-price cost overruns, project delays and liquidated damages, customer payment or funding delays, subcontractor and supplier failures, international political and currency risks, government-contract funding and compliance, and litigation and environmental liabilities.
- Contract mix: 85% of backlog was cost reimbursable and 15% fixed-price, lump-sum or guaranteed-maximum-price work. Fixed-price arrangements expose Fluor more directly to cost overruns.
Important facts for investors to verify
- Track Greater Gabbard completion, final project costs, arbitration outcomes and collection of the $265 million claim and withheld liquidated damages.
- Monitor the St. Joe Minerals appeal, related lawsuits and indemnification recovery; no charge was recorded for the large jury verdict.
- Assess backlog conversion and quality: cancellations, deferrals and scope changes are possible, and backlog does not ensure profitability.
- Check whether margin pressure, project mix and execution risks affect earnings despite revenue growth and a larger backlog.
- Review liquidity and financing needs, including the 2004 convertible notes classified as current, the new 2021 senior notes, credit availability and substantial guarantees.
- Consider concentration and geographic exposure: U.S. government agencies represented 14% and Exxon Mobil and affiliates 13% of 2011 revenue; approximately 78% of backlog was outside the United States.