Fluor Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited filing was signed October 22, 2020, reflecting substantial reporting delays. Fluor decided to retain its Government business, previously classified as discontinued operations; the AMECO equipment business remained held for sale and discontinued.
Financial performance and condition
- Revenue: $4.119 billion, down 0.4% from $4.134 billion in Q1 2019. Total segment profit, a non-GAAP measure, increased to $51.9 million from $38.9 million; segment margin was 1.3% versus 0.9%.
- Losses: Continuing-operations loss attributable to Fluor was $171.1 million ($1.22 per diluted share), compared with $68.1 million ($0.49) in Q1 2019. Including discontinued operations, Fluor’s net loss was $266.0 million ($1.90 per diluted share), versus $68.9 million ($0.49).
- Charges and tax: Continuing operations recorded $297.6 million of impairment, restructuring and exit costs. The AMECO discontinued business recorded a separate $100 million impairment. A $55 million expected-credit-loss reserve and $52 million of project positions for potential COVID-19 delays and cost growth were also reported. The continuing-operations effective tax rate was 29.3%, favorably affected by CARES Act-related tax benefits, partly offset by valuation allowances and other items.
- Cash flow: Operating cash outflow was $63.7 million, compared with $17.5 million in Q1 2019, primarily reflecting greater working-capital outflows. Investing cash outflow was $21.7 million; financing cash inflow was $22.6 million. Cash declined $126.3 million, including a $63.5 million adverse currency effect.
- Liquidity and debt: Cash and cash equivalents were $1.871 billion and marketable securities $6.5 million at March 31. Cash included $442 million held by consolidated VIEs, which was not necessarily available for general use. Short-term borrowings were $51.2 million and long-term debt $1.647 billion. Committed facilities totaled $3.5 billion, but covenant limits permitted approximately $675 million of borrowings; $336 million of letters of credit were outstanding under committed lines and $968 million under uncommitted lines.
- Backlog and awards: Q1 new awards were $4.191 billion, up from $3.400 billion. Backlog was $31.386 billion, down from $31.934 billion at year-end 2019 and $39.424 billion a year earlier. Remaining unsatisfied performance obligations were $29.392 billion. About 53% of backlog consisted of fixed-price or lump-sum contracts.
Notable changes and management commentary
- Revenue was mixed by segment: Mining & Industrial increased to $1.174 billion from $1.051 billion, while Energy & Chemicals declined to $1.356 billion from $1.475 billion. Government revenue declined to $718 million from $756 million; Infrastructure & Power and Diversified Services increased and decreased, respectively.
- Mining & Industrial segment profit rose to $38.7 million from $27.5 million. Energy & Chemicals moved to a $6.4 million loss from $12.2 million profit, affected by credit-loss reserves and COVID-related project positions. Infrastructure & Power improved to $5.2 million profit from a $21.8 million loss. Government profit declined to $30.9 million from $38.4 million.
- Management cited COVID-19, lower commodity prices, potential client and supplier financial distress, reduced demand, project delays or cancellations, and government budget constraints as significant sources of uncertainty. The company performed interim impairment testing; further impacts could follow if disruptions persisted or restrictions returned.
- Management stated that cash, operating cash generation and unused credit capacity were expected to support operating needs for at least the next 12 months, while noting that future losses or impairments could reduce credit capacity. No quantified earnings or revenue guidance was provided.
- Fluor suspended its quarterly dividend on April 29, 2020; the Q1 dividend was $0.10 per share, versus $0.21 a year earlier. Restructuring activities were expected to be substantially completed in 2020.
Risks, contingencies and controls
- Disclosure controls and procedures were reported as ineffective because of material weaknesses in internal control over financial reporting. Management said additional procedures supported the conclusion that the financial statements fairly presented results in accordance with GAAP.
- Fluor reported an SEC investigation and an April 2020 DOJ subpoena concerning projects associated with Q2 2019 charges and related project accounting, reporting and governance matters; the company said it was cooperating.
- Major disputes included Santos claims seeking approximately AUD $1.47 billion, Sadara counterclaims of approximately $574 million, and Barrick arbitration claims of at least $250 million. Management said it was defending these matters and did not believe loss was probable; outcomes remain uncertain.
- Performance guarantees had a stated maximum potential payment amount of $17 billion, representing estimated remaining costs to complete covered work; the recorded performance-guarantee obligation was not material. Unconsolidated VIEs had $77 million of future funding commitments.
- The filing describes the Purple Line project termination and related State lawsuit, as well as significant risks from project cost and schedule estimates, backlog cancellations or deferrals, credit availability, litigation, and further asset impairments.
Important facts for investors to verify
- Whether Fluor remedied the reported material weaknesses and met amended filing deadlines and credit-facility reporting requirements.
- How pandemic and commodity-market effects, project suspensions, credit losses and fixed-price contract exposure affect margins, cash conversion and backlog realization.
- Whether the AMECO sale proceeds and timing align with management’s plan, given the $100 million impairment and ongoing business disruption.
- Developments in SEC and DOJ inquiries, significant project disputes, and the Purple Line litigation, including any resulting financial exposure.
- How much cash is practically available after accounting for VIE restrictions, project needs, credit-facility covenants and outstanding letters of credit.