Fluor Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Amounts below are in U.S. dollars. Segment profit is a company-defined measure and is not the same as consolidated net earnings.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7.14 billion | $6.04 billion | $20.55 billion | $17.13 billion |
| Earnings attributable to Fluor | $144.6 million | $135.4 million | $460.7 million | $440.6 million |
| Diluted EPS | $0.86 | $0.78 | $2.72 | $2.51 |
| Cash provided by operating activities | Not presented separately for the quarter | $510.3 million | $711.2 million |
Q3 revenue increased 18% and Fluor-attributable earnings increased about 7% year over year. For the first nine months, revenue rose 20% and attributable earnings rose about 5%. Revenue growth was led by Industrial & Infrastructure, especially mining and metals, and by Oil & Gas. The filing reports cost of revenue of $6.83 billion for Q3 and $19.65 billion year to date; it does not state a consolidated gross-margin measure.
At September 30, cash and cash equivalents were $2.15 billion; current and noncurrent marketable securities totaled $688.8 million. Together, cash and securities were approximately $2.84 billion, broadly unchanged from year-end 2011. Current assets were $6.52 billion and current liabilities $3.95 billion. Total debt was approximately $548.6 million, including $23.7 million current debt and $524.9 million long-term debt; debt-to-capital was 13.0%, versus 13.6% at year-end 2011. Fluor had $3.8 billion of combined committed and uncommitted credit lines, with $2.7 billion of unused capacity, and reported compliance with debt covenants.
Year-to-date operating cash flow fell to $510 million from $711 million, principally because project working capital increased. Investing activities used $251 million and financing activities used $289 million. Fluor repurchased $164 million of shares and paid $76 million of dividends during the period; the quarterly dividend declared was $0.16 per share.
Segments, awards and backlog
| Segment | Q3 revenue | Q3 segment profit (loss) | Notable comparison or development |
|---|---|---|---|
| Oil & Gas | $2.55 billion | $87.2 million | Revenue and profit increased 15% and 18%; backlog rose 31% year over year to $19.1 billion. |
| Industrial & Infrastructure | $3.20 billion | $132.3 million | Revenue increased 33%; profit nearly doubled, partly because Q3 2011 included Greater Gabbard project charges. Backlog fell to $16.2 billion from $22.3 billion. |
| Government | $790.1 million | $22.9 million | Revenue fell 10% and profit fell 47%, including lower LOGCAP IV award fees. |
| Global Services | $422.9 million | $41.9 million | Revenue increased 8%; profit increased 7%. |
| Power | $169.9 million | $(6.0) million | Q3 2011 profit was $12.6 million; 2012 included $15.7 million of NuScale expenses. |
Consolidated new awards were $6.3 billion in Q3 and $22.0 billion year to date, compared with $6.7 billion and $22.6 billion, respectively, in 2011. Backlog was $40.8 billion at September 30, down 2% from $41.8 billion a year earlier. Mining weakness drove two project cancellations totaling $2.0 billion and delayed customer investment decisions; the filing says the duration of these conditions is uncertain and they could persist.
Outlook, risks and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management described a highly competitive environment and continued margin pressure, including from work mix shifts toward construction and customer-furnished materials. Oil and gas markets and backlog were described as improving, while power-generation demand remained weak.
- Greater Gabbard dispute: Fluor had recognized $278 million of claim revenue for costs incurred and believed recovery probable. The client withheld about $150 million, the contractual maximum for liquidated damages. Arbitration hearings on Fluor’s claims were complete, with a decision pending; the client’s defects counterclaim was scheduled for hearing in 2013. An adverse outcome could result in a substantial earnings charge.
- Other litigation: In the St. Joe lead-related matter, a 2011 verdict imposed $38.5 million in compensatory and economic damages and $320 million in punitive damages. Fluor appealed, believed the judgments would be overturned, and recorded no charge; an unsuccessful appeal or other related cases could result in a substantial charge. Fluor also recorded a $13 million charge in Q1 2012 after an adverse judgment on an embassy-project claim and appealed.
- Claims and guarantees: Recognized claims against clients totaled $298 million, primarily in contract work in progress; final recoveries could differ materially. Performance guarantees outstanding were estimated at $4.3 billion, with an immaterial recorded liability. The maximum amounts potentially payable beyond estimated completion costs were not estimable.
- Other notable items: Q3 2012’s effective tax rate was 34.8%, versus 30.0% in Q3 2011, reflecting additional foreign taxes from an audit settlement and reassessment of tax exposures; the nine-month rates were both 31.7%. In October 2012, Fluor sold an unconsolidated U.K. telecommunications interest and expected to recognize an approximately $40 million pretax gain in Q4.
- Principal business risks: Project execution and cost overruns, client or partner payment and performance issues, cancellations or delayed awards, commodity and economic cycles, litigation, tax audits, foreign currency and political risks, and access to credit, bonding and letters of credit. Management reported no material change in risk factors or market-risk disclosures and stated disclosure controls were effective.
Important facts for investors to verify
- Progress and final outcome of the Greater Gabbard arbitration and the client’s counterclaim, including the recoverability of recognized claim revenue and withheld damages.
- Mining-project cancellations and customer investment deferrals, and their effect on Industrial & Infrastructure awards, backlog and working capital.
- Cash conversion: why operating cash flow declined despite higher earnings, and whether project working-capital needs normalize.
- Exposure and potential developments in the St. Joe and embassy matters, and the scope of guarantees and client claims.
- Power segment performance, including NuScale spending, and the expected Q4 gain from the telecommunications investment sale.