Fluor Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with Q1 2013 unless stated otherwise. Amounts are in U.S. dollars.
Business context and operating results
Fluor provides engineering, procurement, construction, maintenance and related services across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Consolidated revenue fell 25% to $5.38 billion, principally because mining and metals project activity declined; lower Government and Power activity also contributed. Fluor-attributable net earnings were $149 million, or $0.92 per diluted share, versus $166 million, or $1.02.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $5.38 billion | $7.19 billion |
| Earnings before taxes | $271 million | $306 million |
| Income tax expense / effective tax rate | $78 million / 28.8% | $93 million / 30.4% |
| Net earnings attributable to Fluor | $149 million | $166 million |
| Diluted EPS | $0.92 | $1.02 |
| Cash provided by (used in) operations | $187 million | $(22) million |
| Cash and cash equivalents at quarter-end | $2.14 billion | $2.01 billion |
Segments, awards and backlog
- Oil & Gas: Revenue was broadly level at $2.73 billion; segment profit rose to $138 million from $105 million, and margin increased to 5.1% from 3.8%. Management cited a mix shift toward higher-margin engineering work. Awards were $8.8 billion; backlog was $25.7 billion, up 38% year over year.
- Industrial & Infrastructure: Revenue declined 47% to $1.67 billion and segment profit fell 21% to $100 million. Margin improved to 6.0% from 4.1%, partly due to favorable project closeouts. Awards were $924 million; backlog fell to $9.9 billion from $16.0 billion, reflecting reduced mining activity, work performed and a prior project cancellation.
- Government: Revenue declined 21% to $593 million and segment profit fell 70% to $13 million, largely as Afghanistan LOGCAP IV activity wound down and prior-year results benefited from indirect-rate closeouts. Backlog was $2.6 billion, including $1.6 billion of unfunded awards.
- Global Services: Revenue was $143 million and segment profit $19 million, both lower year over year, mainly reflecting reduced equipment activity in Africa and Latin America.
- Power: Revenue declined 34% to $251 million as projects progressed toward completion. Segment loss narrowed to $1 million from $7 million; results included NuScale research and development expense of $13 million.
Company-wide new awards were $10.7 billion, compared with $6.5 billion; approximately 85% of Q1 2014 awards were outside the U.S. Backlog was $40.2 billion versus $37.5 billion a year earlier. Backlog is subject to cancellations and scope changes.
Cash, debt and liquidity
- Operating cash flow improved from an outflow of $22 million to an inflow of $187 million, primarily due to a smaller working-capital increase, including lower receivables. Investing used $94 million and financing used $225 million; the latter included $192 million of share repurchases and $26 million of dividends paid.
- Cash plus current and noncurrent marketable securities totaled approximately $2.6 billion at quarter-end. Total marketable securities were $506 million.
- Debt comprised approximately $526 million of long-term debt and $29 million of current borrowings and convertible notes. Debt-to-capital was 12.5%; Fluor reported compliance with debt covenants.
- Committed and uncommitted credit lines totaled $4.7 billion, with $3.6 billion unused. Management said cash, operating cash generation and unused capacity should meet operating needs for at least 12 months.
- Fluor repurchased and cancelled 2.46 million shares for approximately $192 million. The Q1 dividend declared was $0.21 per share, versus $0.16 a year earlier.
Outlook, risks and unusual items
- No specific financial guidance for the full year is provided in the supplied filing text. Management described Oil & Gas upstream and petrochemicals markets as improving, but noted competitive conditions and margin pressure. Mining customers have deferred major investment decisions; the timing of renewed investment is uncertain. Power demand remained weak.
- Management highlighted execution and cost-estimation risks, project cancellations or delays, client and counterparty payment risk, competition, market cyclicality, foreign exchange, regulatory and tax matters, litigation, and availability of bonding, insurance and credit.
- Outstanding performance guarantees had a stated maximum potential payment amount of $13.6 billion, representing remaining third-party work on contracts; the recorded guarantee liability was not material. The filing says amounts payable beyond estimated completion costs are not estimable.
- A St. Joe Minerals-related jury verdict against Fluor included $38.5 million in compensatory and economic damages and $320 million in punitive damages. Fluor was appealing, did not consider a loss probable, and had recorded no charge; an adverse outcome or unsuccessful indemnity recovery could materially affect earnings. Fluor also reported 19 additional related lawsuits, with possible losses not estimable.
- Recognized client claims included in contract work in progress were $23 million at March 31, 2014, versus none at December 31, 2013. Fluor said ordinary-course litigation and contingencies were not expected to materially adversely affect its consolidated financial position or results, while noting outcomes remain uncertain.
- After quarter-end, Fluor entered a retirement and release agreement with former Industrial & Infrastructure Group President Stephen B. Dobbs: $1.246 million payable over one year from his June 2014 retirement, with stock awards continuing to vest under their grant terms.
Important facts for investors to verify
- Whether the large Oil & Gas awards convert to backlog execution and earnings, and whether the segment’s improved margin persists as project mix changes.
- Further developments in mining and metals investment deferrals, the LOGCAP IV wind-down, and the Power segment’s weak demand and NuScale costs.
- Working-capital and operating cash-flow trends, given project timing and customer advances; also the use of cash for repurchases and dividends.
- The status and potential financial impact of the St. Joe litigation and related indemnity claims, along with the scale and terms of performance guarantees.
- Backlog quality, including cancellations, scope changes and the $1.6 billion of unfunded Government backlog.