Fluor Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. Fluor provides global engineering, procurement, construction, fabrication, maintenance and project-management services through four segments: Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government; and Maintenance, Modification & Asset Integrity (MMAI).
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $19.04 billion | $18.11 billion |
| Earnings from continuing operations before taxes | $546.6 million | $726.6 million |
| Net earnings attributable to Fluor | $281.4 million | $412.5 million |
| Diluted EPS from continuing operations | $2.00 | $2.85 |
| Cash provided by operating activities | $705.9 million | $849.1 million |
| Cash and cash equivalents | $1.85 billion | $1.95 billion |
| Working capital | $1.79 billion | $2.17 billion |
| Total debt (current and long-term) | Approximately $1.60 billion | Approximately $986 million |
| Backlog at year-end | $45.0 billion | $44.7 billion |
- Revenue rose about 5%, but pretax earnings fell about 25%. Gross profit, calculated as revenue less cost of revenue, was approximately $790 million, or 4.2% of revenue, versus approximately $1.095 billion, or 6.0%, in 2015.
- The principal earnings impact was a $265 million pretax charge for revised estimated costs on a U.S. petrochemicals project, reducing diluted EPS by $1.20. The effective tax rate was 40.1%, up from 33.8%; the filing cites foreign losses without tax benefit and a tax-rule-related deferred-tax adjustment among the adverse factors.
- Operating cash flow declined year over year, reflecting lower earnings and less favorable working-capital inflows. Investing activities used $741 million, including the Stork acquisition and $518 million invested in partnerships and joint ventures; capital expenditures were $236 million.
- Year-end current assets were $5.61 billion and current liabilities $3.82 billion. Cash plus current and noncurrent marketable securities totaled approximately $2.11 billion. Management said cash, operating cash generation and unused credit capacity were expected to meet operating needs for at least 12 months.
- Debt increased principally following Stork-related financing and issuance of €500 million of 1.75% notes due 2023. Fluor reported compliance with debt covenants. Letters of credit and borrowings totaling $1.7 billion were outstanding under committed and uncommitted credit lines; this figure includes letters of credit, not solely funded debt.
- Annual dividends declared were $0.84 per share. Fluor repurchased approximately 203,000 shares for $10 million in 2016, compared with $510 million of repurchases in 2015.
Material changes and segment trends
- Energy, Chemicals & Mining: Revenue declined 18% to $9.75 billion and segment profit fell to $401.5 million from $866.6 million, substantially reflecting the project cost charge, weaker mining and metals activity, and lower execution volumes on certain projects. Backlog fell to $21.8 billion from $29.4 billion, including an adjustment for a suspended Canadian LNG project.
- Industrial, Infrastructure & Power: Revenue increased 81% to $4.09 billion and segment profit was $135.8 million, versus a $44.9 million segment loss in 2015. Higher activity on power projects contributed to the improvement; the prior year included a $60 million loss on a Virginia gas-fired power project. Backlog rose to $15.1 billion.
- Government: Revenue increased 6% to $2.72 billion and segment profit was $85.1 million. Backlog reached $5.2 billion, including $2.7 billion of unfunded government awards. Lower activity on Afghanistan’s LOGCAP IV and the UK Magnox project offset growth elsewhere.
- MMAI: Revenue increased 73% to $2.47 billion, largely due to the March 2016 acquisition of Stork, which contributed $1.2 billion of revenue and $10 million of earnings after acquisition. Segment profit declined to $121.9 million from $127.4 million, and margin fell to 4.9% from 8.9%. Stork’s purchase price was approximately $756 million including assumed debt and liabilities.
- Consolidated new awards declined to $21.0 billion from $21.8 billion. Backlog was broadly stable year over year; Fluor expected to perform approximately 42% of year-end backlog in 2017. Backlog is not a guarantee of future revenue or profit and can be delayed, adjusted or cancelled.
Outlook, risks and unusual items
- The filing provides no specific 2017 revenue or earnings guidance. Management’s stated near-term backlog conversion expectation is approximately 42% during 2017. It noted continued pressure on commodity-related awards and execution, while new awards in power, infrastructure and government work supported other areas.
- The largest disclosed project exposure is the $265 million petrochemicals cost revision. Investors should also consider fixed-price exposure: 27% of backlog was fixed-price, lump-sum or guaranteed-maximum work; cost overruns, delays and performance guarantees can erode margins or result in losses.
- Fluor disclosed a potential maximum $16 billion of future payments under outstanding performance guarantees, representing estimated remaining third-party work costs; the recorded guarantee liability was not material. Actual amounts payable beyond estimated completion costs were not estimable.
- Fluor Australia is defending a Santos claim filed in December 2016 seeking approximately AUD $1.47 billion. Management considered the claims without merit and did not believe a loss was probable; no charge was recorded. The company also had $61 million of recognized claim revenue and $41 million of disputed back charges, both dependent on expected recovery.
- Key risks include cyclicality and commodity prices, timing and cancellation of major awards, international political and currency exposure, client collection and working-capital needs, joint-venture performance, government funding and contract compliance, project execution, litigation, and environmental, safety and cyber risks.
- Stork increased goodwill by approximately $417 million and added integration demands. Management and the auditor excluded Stork’s internal controls from their 2016 internal-control assessment; they concluded Fluor’s assessed controls were effective, while Stork integration continued.
- NuScale submitted its small modular reactor design certification application to the U.S. Nuclear Regulatory Commission in December 2016. Its net expenses were $92 million in 2016, partly offset by qualifying DOE reimbursements.
Important facts for investors to verify
- Progress, remaining cost estimates and recoverability of the U.S. petrochemicals project charge, and any further effects on earnings or cash flow.
- Whether backlog converts as expected, particularly the suspended LNG project, unfunded government backlog and major power projects; confirm the terms and funding status of awards.
- Stork’s ongoing profitability, integration costs, acquisition-related debt and the effectiveness of its financial reporting controls after integration.
- Developments in the Santos litigation, other claims and back charges, and the potential effect of Fluor’s guarantees and fixed-price contracts.
- Cash availability after considering restricted or less accessible joint-venture cash, working-capital requirements, credit-line usage and the April 2017 maturity of the €125 million Stork-related facility.