FLUOR CORP annual report, FY2017

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Fluor Corporation — 2017 Form 10-K

Business context and reporting period. Fluor provides engineering, procurement, construction, fabrication, maintenance and project-management services through Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government; and Diversified Services. This filing covers the year ended December 31, 2017; quarterly figures below identify the fourth quarter where relevant.

Financial performance and position

  • Revenue: $19.521 billion, up 2.5% from $19.037 billion in 2016. Cost of revenue was $18.902 billion; the resulting gross margin was approximately 3.2%.
  • Earnings: Pretax continuing-operations earnings were $386.4 million, down 29% from $546.6 million. Net earnings attributable to Fluor were $191.4 million, or $1.36 diluted EPS, versus $281.4 million, or $2.00, in 2016. Return on average shareholders’ equity was 5.9%, versus 9.1%.
  • Cash flow: Operating cash flow was $602.0 million, down from $705.9 million. Capital expenditures were $283.1 million, implying operating cash flow less capital expenditures of approximately $318.9 million. Investing activities used $484.3 million; financing activities used $215.5 million.
  • Liquidity: Cash and cash equivalents were $1.804 billion; cash plus current and noncurrent marketable securities totaled approximately $2.079 billion. Working capital was $2.027 billion, with current assets of $5.601 billion and current liabilities of $3.574 billion. Management said available cash, operating cash generation and unused credit capacity were expected to support requirements for at least 12 months. Some cash held by consolidated joint ventures is restricted to those entities’ activities.
  • Debt: Reported current and long-term debt totaled approximately $1.619 billion, primarily senior notes; the company also had $31.1 million of other borrowings. It reported compliance with debt covenants. Outstanding letters of credit and borrowings under committed and uncommitted lines totaled $1.7 billion; the two committed facilities total $3.5 billion and mature in February 2022.
  • Backlog and awards: Year-end backlog was $30.915 billion, down from $45.012 billion. New awards were $12.566 billion, compared with $20.959 billion. Fluor expected to perform approximately 51% of year-end backlog in 2018; backlog is not a guarantee of future revenue or earnings.

Material changes versus 2016

  • Revenue increased modestly, but pretax earnings and attributable net earnings declined substantially. Earnings were affected by project cost revisions in both years.
  • 2017 included $260 million of pretax charges for estimated cost growth on three fixed-price gas-fired power projects and $44 million for a downstream project. The comparable 2016 period included a $265 million charge for a U.S. petrochemicals project.
  • Backlog fell by about 31%, reflecting work performed exceeding new awards as well as major adjustments and removals. These included the removal of two Westinghouse nuclear projects and a shortened contractual term for the U.K. Magnox project. Awards also fell materially year over year.
  • Government revenue rose 19% and segment profit rose 50%, supported by decommissioning and cleanup work and the Puerto Rico power-restoration project. Industrial, Infrastructure & Power reported a $170.8 million segment loss, chiefly reflecting the gas-fired power project charges.
  • Cash and cash equivalents declined $46 million; operating cash flow decreased, in part because of lower earnings and reduced working-capital inflows. The 2017 tax rate was 31.6%, versus 40.1% in 2016, but included a $37 million charge from U.S. tax reform.

Fourth-quarter results, outlook and notable matters

  • Fourth quarter: Revenue was $5.027 billion; pretax earnings were $151.5 million; net earnings attributable to Fluor were $60.3 million, or $0.43 diluted EPS. Fourth-quarter earnings included $41 million of pretax power-project cost revisions, $29 million of downstream-project revisions, and the $37 million tax-reform charge.
  • Outlook: Management cited continued delays in client final investment decisions, while expecting to execute about 51% of year-end backlog in 2018. The filing does not provide a clear consolidated revenue or EPS forecast.
  • Accounting change: Fluor expected to adopt the new revenue-recognition standard in the first quarter of 2018. It estimated a cumulative reduction to opening retained earnings of $300 million to $350 million; the estimate remained subject to evaluation.
  • Westinghouse exposure: Westinghouse filed for bankruptcy in March 2017; the V.C. Summer project was cancelled and remaining Plant Vogtle work transferred to another contractor. Fluor disclosed pre-petition amounts due of $66 million for V.C. Summer and $2 million for Vogtle, and said project close-out was not expected to materially affect results.
  • Contingencies and guarantees: Santos sought approximately AUD 1.47 billion in damages relating to an Australian project. Fluor disputed the claims, said loss was not probable, and recorded no charge. Outstanding performance guarantees had a maximum potential payment amount estimated at $14 billion; the recorded liability was not material, but amounts payable above estimated completion costs were not estimable.
  • Other risks: Results depend on large, uncertain project awards and execution estimates; 37% of backlog was fixed-price, exposing Fluor to cost overruns. Other disclosed risks include cancellations and delays, client payment and collection risk, international and currency exposures, government funding and contract risk, safety and regulatory matters, and joint-venture performance. The auditor gave an unqualified opinion on the financial statements, and management and the auditor reported effective internal control over financial reporting.

Most important facts for investors to verify

  1. Whether the fixed-price power and downstream projects incur additional cost growth, and how those projects affect margins and cash flow.
  2. How much of the $30.9 billion backlog converts to revenue, whether new awards recover, and the effect of further cancellations or scope changes.
  3. Collection and recovery prospects for Westinghouse-related receivables and the status of the Santos litigation and other claims.
  4. The ultimate tax and retained-earnings effects of the 2018 revenue-standard adoption and remaining Tax Cuts and Jobs Act accounting.
  5. Liquidity available after considering project working-capital needs, restricted joint-venture cash, letters of credit, guarantees and other commitments.