Fluor Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2009; comparisons are with the corresponding 2008 periods. Financial statements are unaudited.
Business context and results
Fluor provides engineering, procurement, construction and related services through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power segments. The global recession was delaying or reducing client capital spending in most segments; Government was the exception noted by management.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $5.42B | $5.67B | $16.51B | $16.25B |
| Earnings before taxes | $265.9M | $301.5M | $872.6M | $882.6M |
| Net earnings attributable to Fluor | $162.1M | $181.9M | $536.2M | $526.6M |
| Diluted EPS | $0.89 | $1.00 | $2.93 | $2.86 |
| Cash provided by operating activities | Not stated quarterly | $539.9M | $873.9M |
Third-quarter revenue fell about 4%, while nine-month revenue increased slightly. Third-quarter attributable earnings declined, chiefly due to lower Oil & Gas and Global Services contributions; nine-month earnings rose modestly, helped by Oil & Gas, Government and Power and lower corporate expense. The nine-month 2008 comparison included a $79.2M gain on sale of a joint-venture interest. Effective tax rates were 34.6% for Q3 and 34.5% for the nine-month period, below the respective 2008 rates of 37.2% and 37.5%.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $1.33B; marketable securities were $1.03B combined, including current and noncurrent securities. Cash was down from $1.83B at year-end 2008.
- Operating cash flow was $539.9M for the first nine months, versus $873.9M a year earlier. Investing activities used $864.0M, substantially reflecting increased purchases of marketable securities; financing activities used $241.9M.
- Current liabilities were $3.33B and current assets $4.91B. Debt included $118.6M of convertible notes classified as current and $17.7M of long-term debt. Debt-to-capital was 4.2%, down from 5.3% at December 31, 2008; the company reported compliance with debt covenants.
- Fluor repurchased 2.8M shares for $113.9M in the first nine months and declared dividends of $0.125 per share per quarter. It had $3.0B in committed and uncommitted letter-of-credit lines, with $1.1B outstanding, plus $141M of general-purpose credit lines.
Segments, awards and backlog
Q3 segment profit was $189.2M for Oil & Gas, $41.6M for Industrial & Infrastructure, $23.6M for Government, $0.5M for Global Services and $44.9M for Power. Notable changes included weaker Oil & Gas and Global Services results; improved Government results; and higher Power profit despite lower revenue. Global Services results included a $45M provision for potential non-collection of a paper-mill receivable.
New awards were $2.9B in Q3 and $15.1B for the first nine months, down from $8.8B and $20.9B, respectively, in 2008. Backlog at September 30 was $28.0B, compared with $36.5B a year earlier. Management attributed the decline chiefly to cancellations, scope reductions and lower Oil & Gas bookings. A Russian gas-processing project delayed indefinitely by the client reduced Oil & Gas backlog by $1.2B during Q3.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management said cash, securities, expected operating cash flow and client advances, unused credit capacity and potential capital-market access were expected to be sufficient for operating needs over the next 12 months. It cautioned that recent Oil & Gas growth and margins would be harder to sustain.
- On the $1.5B Greater Gabbard offshore wind project, Fluor recorded $115M of claim revenue in Q3 for costs incurred in a dispute over required specifications. Further substantial costs were expected; management considered recovery probable but said it expected no project profit until resolution. The company had funded $101M of the recorded costs during 2009.
- Performance guarantees outstanding were $3.3B; potential payments above estimated completion costs were not estimable. Recognized contract claims against clients totaled $199M. The company said claim recoveries could ultimately differ materially from recorded amounts.
- Other disputes included a California infrastructure joint venture with $51M of client-withheld liquidated damages and $14.8M drawn on letters of credit; embassy-project claims; and a Citadel dispute with potential exposure of zero to $28M plus interest, fees and costs. Fluor stated it did not believe a loss was likely in the Citadel matter. London Connect was settled in Q3 with no material segment-profit change.
- Principal risks cited include project delays or cost overruns, client payment problems, cancellations or scope changes, litigation outcomes, lower client investment, recession and credit conditions, and counterparty or joint-venture performance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts to revenue and profit, particularly given lower awards, cancellations, scope changes and the indefinitely delayed Russian project.
- Greater Gabbard claim recoverability, additional costs and the timing of dispute resolution.
- Collectability of the $45M paper-mill receivable and the status and potential outcomes of other contract and legal claims.
- Operating cash generation, working-capital demands, client advances and liquidity needs, including potential convertible-note conversions.
- Whether recession-related project deferrals and segment-level margin pressures persist or worsen.