Fluor Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed September 25, 2020. The filing includes restated 2018 and 2017 financial statements and restated quarterly information for 2018 and 2019. Fluor provides engineering, procurement, construction, maintenance and project-management services globally.
Financial performance and liquidity
| Metric | 2019 | 2018, restated |
|---|---|---|
| Revenue | $14.35 billion | $15.17 billion |
| Net earnings (loss) attributable to Fluor | $(1.52) billion | $173 million |
| Continuing-operations net earnings (loss) attributable to Fluor | $(1.68) billion | $9 million |
| Diluted EPS, total | $(10.87) | $1.23 |
| Operating cash flow | $219 million | $162 million |
| Year-end cash and cash equivalents | $2.00 billion | $1.76 billion |
| Backlog, excluding government business classified as discontinued | $28.38 billion | $35.60 billion |
Revenue declined about 5%. Cost of revenue exceeded revenue by approximately $427 million, a negative gross margin of about 3%. Total segment loss was $386 million, compared with segment profit of $323 million in 2018. Fluor reported $1.52 billion of total net loss, while discontinued operations contributed $154 million of earnings attributable to Fluor.
For the fourth quarter, revenue was $3.64 billion and net loss attributable to Fluor was $296 million, or $(2.11) per diluted share. Continuing-operations loss attributable to Fluor was $381 million; discontinued operations contributed $85 million.
At year-end, total debt was approximately $1.69 billion, including $1.65 billion of long-term debt and $39 million of short-term borrowings. Cash and marketable securities together were approximately $2.00 billion. Current assets were $5.52 billion and current liabilities were $3.93 billion; these include assets and liabilities classified as held for sale. The filing states that cash, unused credit capacity and operating cash flow were expected to support requirements for at least 12 months, subject to the risks and covenant conditions described.
Material changes and operating drivers
- New awards fell to $10.56 billion from $23.54 billion in 2018. Backlog decreased 20%, reflecting work performed exceeding new awards and removal of suspended Mexican joint-venture contracts. Backlog included $1.7 billion in loss-position projects; 59% was fixed-price/lump-sum or guaranteed-maximum work.
- Energy & Chemicals revenue fell to $5.82 billion from $7.70 billion, and the segment recorded a $95 million loss versus $335 million profit. Charges included cost growth on lump-sum offshore and downstream projects, close-out matters and pre-contract costs.
- Infrastructure & Power recorded a $244 million segment loss versus a $30 million loss in 2018, including charges on gas-fired power and infrastructure projects. Mining & Industrial profit improved to $159 million; Diversified Services profit fell to $15 million from $69 million.
- Fluor recorded $533 million of impairment, restructuring and exit costs, including $257 million of investment impairments and $34 million for Stork customer-relationship intangibles. It also recorded a $138 million UK pension-settlement loss, primarily from previously accumulated actuarial losses.
- Cash from operations increased to $219 million, mainly due to working-capital inflows. Cash from investing activities was $80 million; financing activities used $77 million, including $118 million of dividends paid.
Restatement, outlook and significant risks
- Restatement and controls: The Special Committee found material accounting errors on the Radford project, involving late recognition of forecast cost changes and estimation of variable consideration. The filing says the restatement reduced cumulative pre-tax earnings through September 30, 2019 by $3.8 million; it also reduced opening equity by $51 million for periods before 2017. Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2019. The auditor issued an adverse opinion on ICFR, while giving an unqualified opinion on the financial statements.
- Investigations and filing status: SEC and DOJ investigations into prior accounting and reporting remained ongoing. Fluor disclosed that it had not timely filed this 10-K and its first- and second-quarter 2020 reports, had received a NYSE noncompliance notice, and had received a notice of default under its senior-note indenture. The filing describes a 90-day period to cure the note default and lender amendments extending reporting deadlines; failure to cure could permit acceleration of the notes.
- Project claims and contingencies: Fluor was seeking $66 million in unapproved change orders on two downstream projects; combined potential liquidated-damages exposure was approximately $121 million. Named disputes included Santos claims of about AUD $1.47 billion and Sadara counterclaims of about $574 million; Fluor disputed the claims and stated it did not consider a loss probable. A $35 million Barrick letter-of-credit draw was made in 2019. Outcomes and potential losses remain uncertain.
- Other notable exposure: Performance guarantees had a stated maximum potential amount of $17 billion, representing estimated remaining work to complete—not an estimate of likely cash loss. The company said the performance-guarantee obligation was not material at year-end.
- Forward outlook: No earnings or revenue guidance is provided. Fluor expected to perform about 48% of year-end backlog in 2020, but cautioned that backlog may be delayed, changed or cancelled and is not a guarantee of revenue or profit. In 2020 it reversed its plan to sell the government business and decided to retain it; the AMECO sale plan remained. It expected restructuring activities to be substantially completed in 2020.
- Subsequent events: Fluor cited COVID-19 and the early-2020 commodity-price decline as sources of project delays, weaker demand and collection risk. It expected $450 million to $475 million of losses in first-quarter 2020 from related impairment, credit-risk and held-for-sale assessments. The company suspended its dividend on April 29, 2020.
Most important facts for investors to verify
- Whether the remediation of the Radford and Energy & Chemicals control weaknesses is completed and independently demonstrated to be effective.
- Developments, potential penalties and costs from the SEC and DOJ investigations, shareholder litigation and major project disputes.
- Current compliance with debt covenants and reporting requirements, the status of the note default, and remaining committed borrowing capacity.
- Actual cost-to-complete, claims recovery and liquidated-damages outcomes on loss-making lump-sum projects, especially the projects behind the 2019 charges.
- How much of the reported backlog converts to profitable revenue, given the decline in awards, fixed-price mix and loss-position backlog.
- The realized impact of COVID-19, commodity-market weakness and the 2020 forecast losses, plus the status of the AMECO disposition and government-segment reporting.