Fluor Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2013. Fluor provides engineering, procurement, construction, maintenance and related services. Segment comparisons reflect recast 2012 figures following organizational changes effective January 1, 2013.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $7.19bn | $7.13bn | $14.38bn | $13.42bn |
| Earnings attributable to Fluor | $161.4m | $161.2m | $327.9m | $316.1m |
| Diluted EPS | $0.98 | $0.95 | $2.00 | $1.86 |
| Operating cash flow | — | $242.3m | $81.7m |
- Q2 revenue increased about 1%; first-half revenue increased about 7%. Fluor-attributable earnings were essentially flat in Q2 and rose about 4% for the first half. Diluted EPS rose about 3% and 8%, respectively.
- First-half operating cash flow improved primarily because working-capital growth was smaller than in the prior-year period and earnings increased. Cash and cash equivalents declined to $2.11bn from $2.15bn at year-end; cash plus current and noncurrent marketable securities was $2.6bn.
- At June 30, total debt was approximately $515m, comprising $18.5m of current convertible notes and $496.4m of long-term senior notes. Debt-to-capital was 12.5%, versus 13.9% at year-end. Fluor reported compliance with debt covenants.
- Committed and uncommitted credit lines totaled $4.6bn, with $3.8bn unused; $800m of letters of credit and other borrowings were outstanding under the facilities. Management said cash, operating cash generation and unused credit capacity were adequate for at least the next 12 months.
- Quarterly dividends declared were $0.16 per share. First-half capital expenditures were $121.8m.
Material changes and operating trends
- Oil & Gas led growth: first-half revenue rose 30% to $5.63bn and segment profit rose 34% to $211.3m. Management cited increased project execution, including oil sands, petrochemical and Australian coal-bed-methane work.
- Industrial & Infrastructure first-half revenue fell 6% to $6.21bn as mining and metals activity slowed; segment profit increased 5% to $256.3m, supported by industrial services and infrastructure work. Mining customers deferred investment decisions, and the duration of weakness was uncertain.
- Government first-half revenue fell 17% to $1.43bn and segment profit fell 27% to $54.9m, mainly due to reduced LOGCAP IV activity in Afghanistan and lower Savannah River work. Q2 segment profit included a $17m charge related to an embassy-project claim.
- Global Services first-half revenue fell 11% to $304.3m and segment profit fell 22% to $55.3m, reflecting lower equipment-related contributions and the prior-year benefit of a one-time equipment sale and favorable project resolutions.
- Power first-half revenue increased to $805.6m from $380.6m, and segment profit was $3.8m versus a loss of $8.5m. Higher construction progress and project contributions helped; NuScale research and development expense was $28.5m for the half-year.
- Consolidated backlog was $37.0bn at June 30, down 14% from $43.0bn a year earlier. First-half new awards were $13.7bn versus $15.7bn. Backlog decline primarily reflected weaker mining awards and two mining-project cancellations totaling $2.0bn in 2012; backlog is subject to cancellations and scope changes.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described strengthening Oil & Gas markets, while noting competitive margin pressure, a less favorable mix of construction-related work and customer-furnished materials, and weak mining investment. Power demand remained relatively weak; near-term opportunities identified included gas-fired generation, renewables and emissions-compliance work.
- Greater Gabbard project disputes were settled in Q2 with no material earnings effect. Fluor reported no recognized client claims at June 30, compared with $20m at year-end.
- Fluor is appealing a St. Joe Minerals judgment of $38.5m in compensatory and economic damages plus $320m in punitive damages. The company said it did not consider a loss probable and recorded no charge; it also faces 21 additional related lawsuits and is pursuing indemnification. An adverse outcome or unsuccessful indemnification could result in a substantial charge.
- Outstanding performance guarantees were estimated at $5.4bn; the recorded liability was not material. Potential payments beyond estimated contract completion costs were not estimable.
- Fluor expected to contribute $30m–$60m to defined-benefit pension plans in 2013, above minimum required funding; approximately $9m had been contributed in the first half.
- Other disclosed risks include project execution and cost overruns, client or partner payment/default risks, contract awards and cancellations, litigation, global economic and political conditions, foreign exchange, tax audits, and limits on bonding or letter-of-credit capacity. Management reported no material change in risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether the St. Joe appeal, related litigation and indemnification claims change the company’s assessment of potential loss.
- Whether mining-sector delays and cancellations continue to reduce awards, backlog and future revenue.
- Whether LOGCAP IV and Savannah River activity declines, and embassy-claim costs, persistently pressure Government segment results.
- Whether reported cash generation is sustained as project working capital, advance billings and contract execution fluctuate.
- Whether the $5.4bn of performance guarantees, credit-facility usage and pension funding requirements create material cash demands.
- How competitive pricing and project mix affect margins, particularly as construction activity and customer-furnished materials increase.