Fluor Corporation — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Comparative periods are the corresponding 2008 periods unless otherwise noted. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Revenue | $5.293bn | $5.774bn | $11.090bn | $10.581bn |
| Earnings before taxes | $278.3m | $353.3m | $606.8m | $581.1m |
| Net earnings attributable to Fluor | $169.3m | $208.0m | $374.1m | $344.7m |
| Diluted EPS | $0.93 | $1.12 | $2.05 | $1.86 |
| Cash provided by operating activities | — | $380.0m | $690.3m |
- Q2 revenue fell 8%; first-half revenue rose 5%. Q2 earnings attributable to Fluor fell 19%, while first-half earnings rose 9%.
- Cash and cash equivalents were $1.182bn at June 30, down from $1.834bn at December 31, 2008. Current and noncurrent marketable securities totaled $1.144bn, versus $296.5m at year-end; cash plus securities were therefore $2.326bn.
- Current assets were $4.908bn and current liabilities $3.290bn. Debt comprised $121.7m of convertible notes and $17.7m of municipal bonds; the debt-to-capital ratio was 4.4%, down from 5.3% at year-end. Fluor reported compliance with debt covenants.
- First-half investing cash use was $936.9m, principally reflecting purchases of marketable securities; financing cash use was $134.3m, including $61.3m of share repurchases and $45.6m of dividends.
Segments, awards and backlog
- Oil & Gas: Q2 revenue decreased 9% to $3.03bn, while segment profit increased 7% to $180.8m. First-half revenue and profit rose 8% and 25%, respectively. Management cited favorable project forecast adjustments, including approved change orders and resolution of disputes. Backlog was $15.8bn, down from $20.9bn a year earlier.
- Industrial & Infrastructure: Q2 revenue rose 9% to $998.2m, but segment profit fell to $34.1m from $121.4m. The prior-year period included a $79.2m pretax gain on a U.K. wind-power joint-venture sale; current-period margins also reflected project mix and construction activity. Backlog was $9.8bn, up from $7.1bn.
- Government: Q2 revenue rose 59% to $478.9m and segment profit rose to $33.5m from $11.1m. Drivers included Savannah River, LOGCAP IV and FEMA work, plus a $15.3m favorable contract adjustment. Fluor won a LOGCAP IV competition for northern Afghanistan, with potential value above $7.5bn over five years; awards depend on incremental task-order funding.
- Global Services: Q2 revenue fell 35% to $452.3m and segment profit fell to $34.1m from $66.1m. Management cited delayed refinery turnarounds and lower capital work; quarterly segment margin declined to 7.5% from 9.5%.
- Power: Q2 revenue fell 36% to $334.9m as the Oak Grove project progressed toward completion; segment profit was $26.8m versus $24.8m, with improved margins attributed to project mix and completion adjustments.
- Consolidated new awards were $6.8bn in Q2 and $12.3bn in the first half. Backlog at June 30 was $30.9bn, down from $33.0bn a year earlier. First-half backlog adjustments and cancellations were a net $3.8bn reduction, primarily reflecting Oil & Gas project cancellations and scope reductions. About 59% of backlog was international.
Outlook, risks and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management said current cash and securities, operating cash generation, client advances, unused credit capacity and potential debt or equity issuance were expected to cover operating needs for the next 12 months.
- Management warned that the global recession, credit constraints, lower oil and commodity prices, and client spending reviews could delay or cancel projects and reduce awards. It also highlighted execution, cost-overrun, payment, partner, litigation, political, currency, regulatory and tax risks. Backlog is not assured and may be canceled, deferred or rescoped.
- Fluor expected to contribute $70m–$90m to defined-benefit pension plans in 2009; approximately $19m had been contributed in the first half.
- Performance guarantees outstanding were $3.1bn; $1.1bn of letters of credit was outstanding against $2.5bn of committed and uncommitted letter-of-credit capacity. Potential guarantee payments beyond estimated completion costs were not estimable.
- Recognized claims against clients totaled $193m. Significant disputes include a California infrastructure joint venture, the London Connect project, and embassy projects. In the infrastructure matter, the client had withheld $51m in liquidated damages and drawn $14.8m on letters of credit; Fluor expects recovery and had not reserved its proportionate shares. Citadel’s conversion dispute presents a claimed exposure of up to $28m plus interest, fees and costs; Fluor said it did not believe a loss would be incurred. The Conex judgment was reversed and remanded, and Fluor said it did not believe a loss was reasonably possible.
- The Q2 2008 comparison included the $79.2m pretax wind-power joint-venture sale gain. The 2009 results also included a lower effective tax rate: 36.6% for Q2 and 34.5% for the first half, versus 38.3% and 37.7%, respectively, in 2008.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether backlog reductions, project cancellations and delayed client investment continue, particularly in Oil & Gas, Global Services and Power.
- Whether project execution and forecast adjustments support Oil & Gas profitability, and whether weaker Industrial & Infrastructure margins persist.
- Cash generation and liquidity trends, including the effect of client advances, securities purchases, pension contributions and convertible-note conversions.
- Resolution and potential recoveries or losses in the infrastructure, London Connect, embassy and Citadel disputes, alongside the substantial performance-guarantee exposure.
- Funding and task-order awards under the northern Afghanistan LOGCAP IV contract; the stated potential contract value is not equivalent to funded awards or backlog.