Fluor Corporation — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2015, compared with the same periods in 2014. Fluor provides engineering, procurement, construction and related services across Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Segment reporting was reorganized effective January 1, 2015; 2014 segment results were recast.
Financial performance
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $4.81B | $5.25B | $9.36B | $10.64B |
| Continuing earnings attributable to Fluor | $149M | $163M | $293M | $312M |
| Diluted EPS from continuing operations | $1.00 | $1.02 | $1.96 | $1.93 |
| Operating cash flow | — | $204M | $426M |
- Revenue declined 8% in Q2 and 12% in H1, principally reflecting lower mining, metals and infrastructure project activity, plus lower Oil & Gas revenue. Continuing earnings attributable to Fluor fell 9% in Q2 and 6% in H1.
- Gross margin, calculated from reported revenue and cost of revenue, was approximately 6.1% in Q2 2015 versus 6.6% a year earlier; H1 margin was approximately 6.3% versus 6.2%.
- Reported net earnings were $161M in Q2 and $326M in H1 2015. The 2014 comparisons included an $85M after-tax discontinued-operations loss, so reported net earnings are not directly comparable without that item.
- H1 operating cash flow fell to $204M from $426M; the company cited $306M of cash outflows tied to discontinued operations, including the January 2015 settlement payment. Cash and equivalents decreased to $1.72B from $1.99B at year-end; cash plus current and noncurrent marketable securities was approximately $2.13B, down from $2.44B.
- At June 30, current assets were $5.20B and current liabilities $2.74B. Long-term debt was $992M, with no current debt reported. Debt-to-capital was 24.2%, versus 24.7% at year-end. The company had $5.4B of committed and uncommitted credit lines, $4.0B of unused capacity, and $1.4B of letters of credit and borrowings outstanding under those lines.
- Fluor repurchased $214M of shares and paid $64M in dividends in H1. Dividends declared were $0.21 per share per quarter.
Segments, awards and backlog
- Oil & Gas: H1 revenue declined 7% to $5.22B, while segment profit rose 26% to $386M; margin improved to 7.4%. Backlog grew 18% year over year to $28.7B. Management cited a favorable work mix and project forecast revisions, but warned lower oil prices could affect projects and award timing.
- Industrial & Infrastructure: H1 revenue declined 29% to $2.16B and segment profit fell 33% to $129M. Backlog decreased to $6.7B from $9.1B, as project execution outpaced awards and mining customers deferred investment.
- Government: H1 revenue rose 5% to $1.25B and segment profit increased to $32M. Backlog was $4.3B, including $1.9B of unfunded contracts; lower LOGCAP IV activity remained a headwind.
- Global Services: H1 revenue declined 11% to $255M and profit fell 30% to $29M, largely due to lower equipment activity in Afghanistan.
- Power: H1 revenue rose 4% to $472M, but segment recorded an $19M loss versus $14M profit a year earlier. Higher NuScale costs and reduced contributions from projects nearing completion were factors. Backlog was $1.9B.
- Consolidated H1 new awards were $8.7B versus $16.5B in 2014. Backlog was $41.6B at June 30, up from $40.3B a year earlier, but down from $42.5B at year-end 2014. Currency translation reduced H1 backlog by approximately $1.2B. Backlog is subject to cancellations and scope changes.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said cash generated from operations, available credit capacity and cash on hand should meet operating needs for at least the next 12 months.
- The company described a competitive environment with margin pressure. Key risks include project execution delays and cost overruns, client cancellations or payment delays, weaker commodity markets and deferred awards, partner or supplier underperformance, foreign exchange movements, government contract audits, litigation, and tax matters.
- Fluor expects to contribute up to $100M to defined-benefit pension plans in 2015, including funding associated with settling its U.S. plan. Settlement was expected in late 2015, subject to regulatory approval; approximately $269M of unrecognized actuarial losses in accumulated other comprehensive loss could result in additional expense, potentially significant.
- In the St. Joe/Doe Run lead-business matter, Fluor paid $306M in January 2015 and is seeking indemnification from the buyer. Trial was scheduled for October 26, 2015. Management did not expect the ultimate resolution of open matters to materially adversely affect consolidated financial position or results, but outcomes remain uncertain.
- Outstanding performance guarantees had a stated maximum potential payment amount of $15.4B, representing remaining third-party work under contracts; the recorded liability was not material. Amounts payable beyond estimated completion costs were not estimable.
- After quarter-end, Fluor announced an agreement to sell 50% of Fluor S.A. for approximately $43M, subject to closing conditions, and expected a pretax gain exceeding $40M in Q3 2015, including revaluation of its retained interest.
Investor verification points
- Track Oil & Gas award momentum and whether lower oil prices affect existing projects, margins or award timing.
- Assess the duration and financial effects of weak mining and infrastructure investment and declining Industrial & Infrastructure backlog.
- Follow project execution, backlog conversion, cancellations, foreign-currency impacts and the quality of new awards.
- Verify recovery prospects in the St. Joe/Doe Run indemnification litigation and monitor any additional settlement or legal costs.
- Check the U.S. pension plan settlement timing, required contributions and resulting noncash or cash charges.
- Monitor liquidity and working-capital conversion, including the restricted availability of some consolidated VIE cash, and the scale of guarantee and letter-of-credit commitments.
- Confirm completion and accounting treatment of the Fluor S.A. transaction and the expected gain.