Fluor Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with the three months ended March 31, 2009, unless noted. Financial statements are unaudited. Fluor provides engineering, procurement, construction and related services across five reported segments.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $4.919 billion | $5.798 billion |
| Earnings before taxes | $233.1 million | $328.5 million |
| Net earnings | $153.7 million | $221.3 million |
| Net earnings attributable to Fluor | $136.6 million | $204.8 million |
| Diluted EPS | $0.76 | $1.12 |
| Operating cash flow | $(252.6) million | $76.1 million |
- Revenue declined 15%; Fluor-attributable net earnings fell about 33%. Management attributed the decreases mainly to the global recession, changing market conditions and weaker demand for new refining, petrochemical and polysilicon capacity.
- Gross margin was approximately 5.3% of revenue, versus 6.0% in Q1 2009, calculated from reported revenue less cost of revenue. The effective tax rate was 34.1%, compared with 32.6%.
- Cash and cash equivalents were $1.609 billion at March 31, down from $1.687 billion at year-end 2009. Cash plus current and noncurrent marketable securities totaled about $2.3 billion, versus $2.6 billion at year-end.
- Operating cash use reflected a $486.1 million aggregate outflow from changes in operating assets and liabilities, including working capital to support project execution and increased government-segment contract work in progress. Investing provided $236.0 million, including net proceeds from marketable securities; financing used $66.4 million.
- Total debt was approximately $117.5 million, including $99.7 million of convertible notes and $17.7 million of long-term debt. Debt-to-capital was 3.3%, versus 3.7% at December 31, 2009. Fluor reported compliance with debt covenants.
- Current assets were $5.252 billion and current liabilities $3.257 billion at March 31, 2010. The filing reports $3.0 billion in committed and uncommitted credit lines, with $2.0 billion of unused capacity; $1.0 billion of letters of credit was outstanding.
- Quarterly dividend declared was $0.125 per share, unchanged from Q1 2009. Fluor repurchased 379,600 shares for approximately $17.1 million under its repurchase program.
Segments, awards and backlog
- Oil & Gas: Revenue $2.139 billion, down 37%; segment profit $92.3 million, down 54%. Profit margin was 4.3%, versus 6.0%. Lower activity, project completions and a shift toward lower-margin construction work weighed on results.
- Industrial & Infrastructure: Revenue $1.243 billion, up 5.7%; segment profit $31.7 million, up 13%. Backlog rose 31% year over year to $10.5 billion, led by mining and metals awards.
- Government: Revenue $662.8 million, up 79%; segment profit $35.3 million, up 27%, primarily reflecting LOGCAP IV work in Afghanistan. Backlog was $829 million, versus $574 million.
- Global Services: Revenue $339.1 million, down 20%; segment profit $27.4 million, versus $47.4 million. Weak capital work, fewer refinery turnarounds and lower-margin work affected results.
- Power: Revenue $534.2 million, up 16%; segment profit $56.5 million, versus $28.3 million, benefiting from project execution and Oak Grove performance guarantees. Backlog fell to $1.5 billion from $2.6 billion.
- New awards were $3.36 billion, versus $5.49 billion. Ending backlog was $25.70 billion, down from $29.13 billion a year earlier; work performed exceeded awards, partly offset by positive net adjustments and cancellations. About 68% of Q1 awards and 63% of ending backlog were international.
Outlook, risks and unusual items
- Fluor gave no specific earnings or revenue forecast in the provided filing text. It said cash generation and unused credit capacity should be sufficient for operating needs for at least the next 12 months.
- Management cited possible initial signs of an Oil & Gas recovery in 2010, particularly in some markets outside the United States, but expected intense competition and margin pressure. Global Services recovery timing remained unclear. Power faced permitting delays for coal-fired plants and weak demand conditions.
- Fluor expected to contribute approximately $50–$90 million to defined-benefit pension plans in 2010, above minimum funding; approximately $9 million was contributed in Q1.
- Claims and disputes: Recognized claims against clients totaled $253 million at March 31; actual recoveries could differ materially. A California infrastructure joint venture had $51 million of liquidated damages withheld and $14.8 million drawn on letters of credit; the client filed for Chapter 11 in March 2010. Fluor believes its share of withheld amounts and letter-of-credit draws will be recovered and recorded no related reduction or reserve. The Greater Gabbard dispute included $168 million of claim revenue recorded; substantial additional costs were expected, and Fluor considered recovery probable but recognized no profit pending resolution.
- Performance guarantees outstanding were estimated at $3.7 billion, though the recorded guarantee liability was not material. Unconsolidated VIE investments were $126 million, with $21 million of future funding commitments; consolidated VIE assets are restricted to their respective entities.
- Other notable litigation: Fluor said it did not believe a loss was reasonably possible in the Conex matter or its dispute with Citadel; Citadel had appealed a judgment for Fluor. Fluor stated that legal proceedings, individually or collectively, were not expected to have a material adverse effect after recorded provisions.
- Key broader risks include contract execution and cost overruns, award levels and cancellations, client or partner financial viability and payment delays, litigation outcomes, credit availability, foreign exchange and commodity exposure, and political, regulatory and labor conditions. Derivatives were used for hedging, not trading; the filing reported no material change in market risk.
Important facts for investors to verify
- Whether working-capital investment and contract work in progress convert into operating cash, particularly in Government and Industrial & Infrastructure.
- Backlog conversion, new-award trends and project cancellations, especially in Oil & Gas and Power.
- Recoverability and timing of major claims, including Greater Gabbard and the California infrastructure joint venture following the client’s bankruptcy.
- Actual project costs, guarantee exposure and potential cash demands under the $3.7 billion of outstanding performance guarantees.
- Progress against 2010 pension funding expectations and the effect of remaining convertible-note conversions.