Fluor Corporation — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Fluor provides engineering, procurement, construction and related services across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Interim results may not indicate full-year results.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $5.44B | $6.68B | $16.08B | $21.06B |
| Earnings from continuing operations attributable to Fluor | $183M | $173M | $495M | $501M |
| Net earnings attributable to Fluor | $70M | $173M | $296M | $501M |
| Diluted EPS, continuing operations | $1.15 | $1.05 | $3.08 | $3.05 |
| Diluted EPS, total | $0.44 | $1.05 | $1.84 | $3.05 |
| Cash from operating activities | — | $407M | $703M |
- Revenue declined 19% in Q3 and 24% year to date, principally due to lower mining and metals project activity in Industrial & Infrastructure. Continuing-operations earnings attributable to Fluor rose in Q3 but were essentially flat for the nine months.
- After-tax discontinued-operations losses were $114M for Q3 and $199M year to date, relating to estimated contingencies from the former St. Joe Minerals/Doe Run lead business. These losses reduced reported net earnings.
- Cost of revenue was $5.06B in Q3 and $15.04B year to date. The resulting gross margin, calculated as revenue less cost of revenue, was approximately 7.0% in Q3 and 6.5% year to date, versus approximately 5.3% and 4.9% in the comparable 2013 periods.
- The effective tax rate on continuing operations was 33.4% in Q3 and 31.4% year to date, versus 28.7% and 29.9%. Fluor attributed the increase mainly to 2013 U.S. federal research-credit benefits that were not extended beyond 2013.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $1.90B; current and noncurrent marketable securities totaled about $501M. Cash plus marketable securities was approximately $2.4B, down from $2.7B at year-end 2013.
- Nine-month operating cash flow fell to $407M from $703M, primarily due to a larger working-capital increase, including changes in contract work in progress and prepaid income taxes. Investing activities used $181M; financing activities used $562M, including $411M of share repurchases and $93M of dividends paid.
- Total debt was approximately $527M, including $30M current borrowings and $497M long-term debt. Debt to total capitalization was 12.9%, versus 12.3% at year-end. Fluor reported compliance with debt covenants.
- Committed and uncommitted credit lines totaled $5.4B; $1.3B of letters of credit and borrowings was outstanding, leaving reported unused credit capacity of $4.1B. Management said cash, operating cash generation and available credit were sufficient for at least the next 12 months.
Business trends, outlook and material developments
- Oil & Gas: Q3 revenue increased 12% and segment profit 65%; nine-month segment profit rose 51%. Management cited stronger upstream and petrochemical work and a shift toward higher-margin engineering. Segment backlog was $26.5B, up from $18.7B a year earlier.
- Industrial & Infrastructure: Revenue fell 54% in Q3 and 51% year to date; segment profit fell 23% in both periods, primarily due to reduced mining and metals activity. Backlog declined to $8.7B from $13.8B, reflecting work performed and a previously cancelled mining project. Timing of any mining investment recovery was uncertain.
- Government: Segment profit declined 22% in Q3 and 40% year to date, mainly as LOGCAP IV activity in Afghanistan decreased. Backlog was $5.2B; its year-over-year increase partly reflects the inclusion of unfunded portions of certain multi-year government awards.
- Global Services and Power: Both reported lower revenue year to date. Global Services profit declined with weaker equipment activity. Power’s nine-month profit improved, partly due to project progress and DOE cost-sharing reimbursements for NuScale; anticipated DOE funding is subject to congressional appropriations.
- Consolidated new awards were $6.0B in Q3 and $22.5B year to date. Backlog at September 30 was $42.3B, compared with $36.5B a year earlier. Management cautioned that backlog can be affected by cancellations and scope changes; approximately 72% related to projects outside the U.S.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management described a competitive environment and margin pressure, with improving Oil & Gas activity but continuing weakness in mining and metals and declining LOGCAP IV work.
Risks, contingencies and unusual items
- Fluor recorded discontinued-operations losses following its reassessment of St. Joe/Doe Run litigation contingencies. In October 2014 it entered a settlement agreement with counsel for a number of plaintiffs; the company anticipated approximately $300M of related cash outflows in Q4 2014. Recovery through indemnification remains an issue, and the company said it could not estimate a range of possible losses in remaining lawsuits.
- On October 29, 2014, the board approved termination of the U.S. defined benefit pension plan effective December 31, 2014, subject to regulatory approval. Settlement was expected in late 2015; Fluor disclosed approximately $160M of unrecognized actuarial losses that could be recognized, plus potentially significant additional expense. It did not expect settlement to materially affect cash.
- Potential future payments under performance guarantees were estimated at $18.0B, representing remaining costs of work to be performed by or on behalf of third parties; excess amounts, if any, were not estimable. The recorded guarantee liability was not material.
- Other risks cited include project execution and cost overruns, competitive pricing, award and cancellation uncertainty, client or partner payment/performance, litigation, foreign exchange, political and economic conditions, and tax audits. The company reported no material changes to its risk factors or market-risk disclosures.
Important facts for investors to verify
- Final settlement payments, remaining litigation exposure and the collectability and timing of indemnification for the St. Joe/Doe Run matters.
- Whether working-capital movements and operating cash flow improve, particularly as customer advances and project billings change.
- Backlog conversion and award quality, including the unfunded government backlog and continued mining-sector weakness.
- The financial and accounting effects of the U.S. pension plan termination and settlement, including regulatory approval and actual settlement costs.
- Performance-guarantee exposure and project execution outcomes relative to remaining billable amounts and costs to complete.
- Availability and terms of DOE reimbursements for NuScale, which depend on qualified expenditures and congressional appropriations.