Fluor Corporation — Q1 2009 Form 10-Q
Business context and period: Engineering, procurement, construction and services company. Unaudited results cover the three months ended March 31, 2009, compared with Q1 2008; balance-sheet comparisons are with December 31, 2008. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2009 | Q1 2008 / prior date |
|---|---|---|
| Revenue | $5,797.9 | $4,807.0; up 21% |
| Earnings before taxes | $328.5 | $227.8 |
| Net earnings attributable to Fluor | $204.8 | $136.7 |
| Diluted EPS | $1.12 | $0.74 |
| Operating cash flow | $76.1 | $213.8 |
| Cash and cash equivalents | $1,470.3 | $1,834.3 at Dec. 31, 2008 |
| Marketable securities | $577.1 | $273.6 at Dec. 31, 2008 |
| Total debt | $141.5 | $150.9 at Dec. 31, 2008 |
| Current assets / current liabilities | $4,958.8 / $3,219.1 | $4,668.5 / $3,162.2 at Dec. 31, 2008 |
Pre-tax margin was approximately 5.7%, versus 4.7% in Q1 2008; net earnings attributable to Fluor were approximately 3.5% of revenue, versus 2.8%. The effective tax rate declined to 32.6% from 36.6%, principally due to a deferred tax benefit on unremitted foreign earnings and greater earnings attributable to nontaxable noncontrolling interests.
Operating cash flow fell as changes in operating assets and liabilities used $178.4 million, compared with a $38.2 million source in Q1 2008. Investing activities used $340.4 million, including $299.6 million net purchases of marketable securities and $53.1 million of capital expenditures. Financing activities used $99.1 million, including $60.1 million for share repurchases and $22.8 million in dividends. The company reported a 4.8% debt-to-capitalization ratio and compliance with debt covenants.
Material changes and operating trends
- Revenue and earnings increased with higher project execution volumes from prior-year awards. Consolidated segment profit was $332.3 million, up from $249.1 million.
- Oil & Gas revenue rose to $3,369.6 million from $2,603.3 million and segment profit to $200.8 million from $137.5 million; favorable project-completion adjustments, mainly approved change orders, contributed.
- Industrial & Infrastructure revenue grew 48% to $1,176.5 million, while segment profit slipped to $28.1 million from $29.4 million; the segment cited a mix shift toward lower-margin construction activity.
- Government revenue increased to $370.8 million from $279.7 million and segment profit to $27.7 million from $7.7 million, reflecting project and task-order activity.
- Global Services revenue declined 23% to $542.1 million, while segment profit increased to $55.5 million from $53.5 million. Power revenue fell 20% to $338.9 million and segment profit was $20.2 million versus $21.0 million.
- New awards were $5.5 billion, compared with $5.7 billion. Backlog ended at $29.1 billion, down from $31.5 billion a year earlier and $33.2 billion at the start of the quarter. Net adjustments and cancellations were a $4.0 billion reduction, principally reflecting Oil & Gas cancellations and scope reductions.
Outlook, risks, contingencies and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said the global recession was affecting near-term client capital plans in all segments except Government; delays, cancellations and scope reductions could weigh on awards, backlog and future execution.
- Management expected to contribute approximately $70–$90 million to defined-benefit pension plans in 2009, above minimum funding requirements; approximately $15 million had been contributed in Q1.
- Management believed cash, operating cash generation, client advance billings, unused credit capacity and potential access to debt or equity markets would be sufficient for operating needs over the next 12 months. It noted that reduced or unreplaced client advances could lower cash.
- Key disputes include a California infrastructure joint venture, where the client had withheld $51 million in liquidated damages and drawn $14.8 million under letters of credit; the London Connect project, involving claims and withheld amounts; and claims on completed embassy projects. Fluor said it expected recovery of the California amounts and did not reserve its proportional share. Recognized client claims totaled $206 million at quarter-end; actual recoveries could differ materially.
- Fluor disclosed a possible loss range of zero to $28.3 million, plus interest, fees and costs, in its dispute with Citadel over conversion of notes, but said it did not believe a loss would be incurred. The Conex judgment against Fluor was reversed in December 2008 and remanded for a new trial; the company said it did not believe a loss was reasonably possible based on the matter’s status.
- Performance guarantees and letters of credit support project commitments. Fluor had $1.1 billion of letters of credit outstanding against $2.5 billion of committed and uncommitted lines; amounts potentially payable beyond estimated completion costs were not estimable. The company reported no material change in guarantees and no material financial guarantees outstanding.
- Fluor hedged currency and commodity exposures, not for trading: gross notionals were $124 million for foreign exchange contracts and $84 million for commodity swaps. Hedge ineffectiveness was immaterial.
- Adoption of convertible-debt accounting guidance increased additional paid-in capital by $24.4 million and reduced December 31, 2008 retained earnings by $24.2 million; Q1 2009 net earnings attributable to Fluor were reduced by $0.2 million. The filing says the adoption of other specified new accounting standards did not materially affect results.
Important facts for investors to verify
- Whether recession-driven project delays, cancellations and scope reductions continue to reduce awards and backlog, particularly in Oil & Gas, mining and services.
- How much of reported earnings growth reflects sustainable project execution versus favorable completion adjustments and the lower tax rate.
- Whether operating cash flow improves as working-capital requirements change, and whether planned pension contributions and client advances affect liquidity.
- Progress and ultimate recoveries or liabilities in the infrastructure, London Connect, embassy and Citadel disputes, including client claims and withheld amounts.
- Conversion and settlement status of the remaining convertible notes and the terms and pace of any future share repurchases.