Fluor Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 25, 2010. Fluor provides global engineering, procurement, construction, maintenance and project-management services through five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power.
Financial performance and position
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $21.99 billion | $22.33 billion |
| Earnings before taxes | $1.137 billion | $1.142 billion |
| Net earnings attributable to Fluor | $684.9 million | $716.1 million |
| Diluted EPS | $3.75 | $3.89 |
| Cash from operations | $899.3 million | $974.6 million |
| Capital expenditures | $233.1 million | $299.6 million |
| Year-end cash and cash equivalents | $1.687 billion | $1.834 billion |
| Working capital | $1.821 billion | $1.506 billion |
| Total debt | $127.5 million | $150.9 million |
| Debt as a percentage of total capitalization | 3.7% | 5.3% |
Approximate pretax margin was 5.2% in both years; net margin attributable to Fluor was 3.1% in 2009 versus 3.2% in 2008. Operating cash flow less capital expenditures was approximately $666 million. Cash plus current and noncurrent marketable securities totaled $2.6 billion at year-end. The company reported $3.0 billion of committed and uncommitted credit lines, $1.9 billion of unused capacity and $1.1 billion of letters of credit outstanding. Management said available cash generation and unused capacity were sufficient for operating needs for at least 12 months; Fluor was in compliance with debt covenants.
Fourth-quarter 2009 revenue was $5.479 billion, pretax earnings were $264.2 million, net earnings attributable to Fluor were $148.7 million and diluted EPS was $0.82.
Material changes and segment results
- Revenue was nearly flat year over year, but new awards declined 26% to $18.5 billion from $25.1 billion. Backlog fell 19% to $26.8 billion from $33.2 billion. Fluor removed approximately $5.3 billion of previously reported backlog during 2009 because of cancellations or scope reductions; Oil & Gas accounted for about $5.2 billion of these adjustments.
- Oil & Gas revenue decreased 9% to $11.8 billion; segment profit edged up to $729.7 million and margin improved to 6.2% from 5.6%. Ending backlog dropped to $11.8 billion from $21.4 billion.
- Industrial & Infrastructure revenue rose 39% to $4.8 billion, but segment profit declined to $140.4 million from $208.2 million. The 2008 comparison included a $79.2 million gain from selling the Greater Gabbard wind-project interest; 2009 margins also reflected a shift toward construction work and project-specific pressures. Backlog grew to $10.3 billion from $6.7 billion.
- Government revenue increased 50% to $2.0 billion and segment profit rose to $116.8 million from $52.2 million, supported by LOGCAP IV work in Afghanistan and the Savannah River site.
- Global Services revenue fell 23% to $2.1 billion and segment profit declined to $140.1 million from $229.3 million. Results included a $45 million charge for a client receivable deemed uncollectible, as well as recession-related weakness.
- Power revenue declined 33% to $1.3 billion as the Oak Grove coal project neared completion. Segment profit increased to $124.2 million from $75.4 million, and margin rose to 9.6% from 3.9%.
Approximately 62% of year-end backlog was outside the United States, and about 73% of 2009 awards were for projects outside the country. Fluor expected to perform approximately 60% of backlog during 2010; backlog is not a guarantee of revenue or profit. The existing backlog was 79.4% cost reimbursable and 20.6% guaranteed-maximum or fixed-price.
Outlook, risks and unusual items
- Management stated that Oil & Gas’s recent high growth and profitability were not expected to continue in 2010. Credit-market disruption, lower oil prices and client spending reassessments had delayed, reduced or cancelled projects. Management also cited continued uncertainty about recovery in Global Services and permitting and financing challenges in Power.
- Principal risks include backlog cancellations and delays, dependence on new project awards, competitive pricing and margin pressure, economic and commodity-market cyclicality, client payment delays, subcontractor and supplier performance, cost overruns on fixed-price work, and international political, security and currency exposures.
- Government work is subject to annual Congressional funding, termination rights, audits and extensive regulation. Fluor cautioned that funding changes, compliance failures or disallowed costs could reduce revenue and profits or restrict future contracting.
- Greater Gabbard was a significant contingency: Fluor had recorded $162 million of claim revenue for costs incurred in a dispute over project specifications, expected further costs, and considered recovery probable. The company said it did not expect to recognize project profit until the dispute was resolved. The dispute used $152 million of cash funding during 2009.
- Other disputed matters include a California infrastructure joint venture, where the client withheld $51 million in liquidated damages and drew $14.8 million on letters of credit; Fluor believed amounts would be recovered. Fluor reported $247 million of recognized claims against clients at year-end, versus $202 million a year earlier, and noted actual recoveries could differ materially.
- Outstanding performance guarantees were estimated at $3.6 billion, although the recorded liability was not material. The filing also identifies tax-audit uncertainty, pension assumptions, environmental and safety exposure, and project-estimate revisions as risks. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Notable comparability items: 2009 included the $45 million pretax Global Services receivable charge. 2008 included the $79.2 million Greater Gabbard sale gain and $28 million of tax benefits from statute expirations and settlements. The effective tax rate was 35.5% in 2009 versus 34.4% in 2008; 2008 benefited from tax items.
Fluor paid $0.50 per share in dividends in 2009 and repurchased 3.06 million shares for $125.4 million. It contributed $34 million to defined-benefit plans in 2009 and expected 2010 funding of approximately $50–$90 million.
Investor verification priorities
- Track Oil & Gas awards, backlog replacement and the timing and scale of project cancellations or deferrals.
- Assess whether Greater Gabbard claim revenue and future cost recovery are realized, and monitor cash tied up in the dispute.
- Verify collectability and settlement outcomes for recognized claims, particularly the California infrastructure and embassy matters.
- Monitor Global Services demand and credit exposure, including whether further client receivable provisions arise.
- Review project mix, fixed-price exposure, margins and actual conversion of backlog into revenue and cash.
- Check government contract funding, credit-line availability, letters of credit, pension contributions and tax-contingency developments.