Fluor Corporation — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011. Figures are unaudited; financial amounts are U.S. dollars.
Business context and operating results
Fluor provides engineering, procurement, construction, maintenance and related services through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power segments. Consolidated revenue increased 10% in both the quarter and first nine months, to $6.04 billion and $17.13 billion, respectively.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $6.04B | $5.51B | $17.13B | $15.58B |
| Net earnings attributable to Fluor | $135.4M | $(53.6)M | $440.6M | $240.4M |
| Diluted EPS | $0.78 | $(0.30) | $2.51 | $1.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $711.2M | $210.4M |
Q3 gross profit was approximately $262.1 million, or 4.3% of revenue, versus $61.8 million, or 1.1%, in Q3 2010. For the nine-month periods, gross profit was approximately $839.2 million (4.9% of revenue), compared with $606.1 million (3.9%). The filing attributes the earnings improvement principally to fewer large project charges than in 2010.
Financial position, cash flow and capital
- Cash and cash equivalents were $2.39 billion at September 30, 2011, up from $2.13 billion at year-end 2010. Cash plus current and noncurrent marketable securities totaled approximately $2.8 billion. Cash held at consolidated variable-interest entities included $537.7 million.
- Current assets were $6.05 billion and current liabilities $3.80 billion. Total debt was approximately $537 million: $500 million of 3.375% Senior Notes due 2021 and $23.7 million of remaining convertible notes, plus municipal bonds. Debt-to-capital was 14.0%, versus 3.2% at December 31, 2010. Fluor reported compliance with debt covenants.
- Cash from operations of $711 million was partly offset by $105 million used in investing and $299 million used in financing; cash increased by $251 million after exchange-rate effects. Financing included $600 million of share repurchases, $66 million of dividends paid and $496 million of net proceeds from the new notes.
- Committed and uncommitted credit lines totaled $3.7 billion, with $2.6 billion of unused capacity. Management said cash, operating cash generation and unused capacity were sufficient for requirements over at least the next 12 months.
- Fluor repurchased 9.3 million shares for $600 million during the first nine months, and declared dividends of $0.125 per share per quarter. The company issued $500 million of 3.375% Senior Notes in September for general corporate purposes.
Changes versus prior comparable periods
- Industrial & Infrastructure revenue rose 34% for the nine months, and segment profit improved to $268.5 million from a $67.3 million loss, largely reflecting the absence of the prior-year $163 million Greater Gabbard charge and $95 million charge on a completed California infrastructure joint venture project.
- Oil & Gas revenue rose 27% in Q3, but segment profit fell 2%; nine-month segment profit declined 23%, with margins pressured by a shift from higher-margin engineering to construction work and more customer-furnished materials.
- Government revenue grew 11% in Q3 and 14% year to date, supported by LOGCAP IV and the Portsmouth Department of Energy contract. Global Services Q3 revenue declined 7%, while nine-month revenue and segment profit increased 8% and 18%.
- Power revenue fell 63% in Q3 and 60% year to date as major projects neared or reached completion; nine-month segment profit declined 51%.
- New awards totaled $6.7 billion in Q3 and $22.6 billion for nine months. Backlog reached $41.8 billion, up 27% from September 2010; approximately 80% was outside the United States.
Outlook, risks and unusual items
- No specific consolidated full-year revenue or earnings guidance is provided in this filing. Management cautioned that sluggish global conditions and intense competition are pressuring margins; a greater mix of lump-sum construction work and customer-furnished materials can also weigh on profitability.
- Greater Gabbard remains a significant execution and recovery risk. Fluor recorded $38 million of Q3 and $52 million of nine-month 2011 charges, primarily for subsea cable installation costs. It had recognized $243 million of claim revenue for costs incurred, while the client withheld approximately $150 million in liquidated damages. Fluor expects substantial project completion in early 2012, but claim resolution may take longer; unrecovered claims or liquidated damages could cause further charges.
- A jury awarded $38.5 million in compensatory and economic damages and $320 million in punitive damages in the Alexander/Preston lead-related litigation. Fluor plans to appeal, believes the judgments are likely to be overturned, and did not accrue a loss because it did not consider a loss probable. This is a material legal uncertainty despite management’s position.
- Outstanding performance guarantees were estimated at $4.6 billion; the recorded liability was not material. Recognized claims against clients totaled $276 million, and ultimate recoveries may differ materially from recorded amounts.
- Management expected to contribute approximately $60 million–$100 million to defined-benefit pension plans in 2011; about $50 million had been contributed through September. The U.S. plan was amended to freeze future service-related benefit accruals for certain participants at year-end 2011.
- Other stated risks include project execution and cost overruns, client or subcontractor defaults, contract cancellations, litigation, market cyclicality, permitting delays in Power, currency movements and constraints on bonding or credit availability.
Key facts for investors to verify
- Whether Greater Gabbard claims and withheld liquidated damages are ultimately recovered, and whether additional project costs or charges arise.
- The status and potential financial outcome of the lead-related appeal and the company’s indemnification rights.
- Whether the $41.8 billion backlog converts to revenue and profit as expected, given that cancellations, scope changes and deferrals may occur.
- How segment margins evolve amid competitive pricing and shifts toward lower-margin construction work, particularly in Oil & Gas and Power.
- Cash availability and financing capacity, considering project working-capital needs, cash held in VIEs, $1.1 billion of outstanding letters of credit and $4.6 billion of performance guarantees.
- The amount and timing of any further conversions of the remaining convertible notes, and the effect of share repurchases on share count and capital allocation.