Fluor Corporation — Q1 2016 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2016. Fluor provides engineering, procurement, construction, maintenance and related services. Comparisons below are with Q1 2015 unless stated otherwise; amounts are in U.S. dollars.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $4.424 billion | $4.549 billion; down 2.7% |
| Gross profit (revenue less cost of revenue) | $255.8 million; 5.8% margin | $297.5 million; 6.5% margin |
| Earnings before taxes | $189.2 million | $248.9 million |
| Net earnings attributable to Fluor | $104.3 million | $144.1 million |
| Diluted EPS | $0.74 | $0.96 |
| Operating cash flow | $114.7 million | $39.3 million |
| Investing cash flow | $(559.9) million | $(18.1) million |
| Financing cash flow | $170.8 million | $(154.0) million |
| Cash and cash equivalents | $1.697 billion | $1.950 billion at Dec. 31, 2015 |
| Debt on balance sheet | $1.691 billion, including $118.9 million current borrowings | $986.6 million long-term debt at Dec. 31, 2015 |
The effective tax rate rose to 37.1% from 33.5%, primarily because foreign losses did not generate tax benefits. Total segment profit was $241.1 million, down from $275.9 million. Fluor declared dividends of $0.21 per share in both periods.
Material changes and drivers
- Energy, Chemicals & Mining revenue declined 18% to $2.444 billion and segment profit fell 16% to $182.0 million, reflecting lower mining and metals activity and large upstream projects completing or nearing completion. Segment backlog was $26.8 billion, down from $29.7 billion.
- Industrial, Infrastructure & Power revenue rose 52% to $833.3 million, mainly on power project activity; segment profit increased to $11.9 million. Backlog rose to $10.3 billion, including a major nuclear construction workforce award booked in Q4 2015.
- Government revenue increased 6% to $686.0 million and segment profit rose to $17.1 million. New awards included environmental and nuclear work; LOGCAP IV activity continued to decline.
- Maintenance, Modification & Asset Integrity revenue increased 24% to $461.1 million, including one month of Stork, acquired March 1. Segment profit fell 10% to $30.1 million, and margin declined to 6.5% from 9.0%.
- Consolidated new awards were $4.7 billion versus $4.4 billion. Backlog reached $46.0 billion, up from $41.2 billion a year earlier; the Stork acquisition contributed $1.5 billion. Backlog is subject to cancellations, scope changes and deferrals.
Liquidity, debt and notable items
Cash plus current and noncurrent marketable securities totaled about $2.0 billion at quarter-end, compared with $2.4 billion at year-end. Current assets were $5.403 billion and current liabilities $3.590 billion. Management said cash, operating cash generation and $4.2 billion of unused credit capacity were sufficient for at least the next 12 months. The debt-to-capital ratio increased to 35.4% from 24.8% at year-end; Fluor reported compliance with all debt covenants.
Fluor acquired Stork for an aggregate purchase price of approximately $756 million, including assumed debt and other liabilities. Stork contributed $121 million of revenue and $3 million of earnings before taxes after acquisition, excluding transaction costs, integration costs and interest expense. The purchase-price allocation was provisional, with approximately $578 million preliminarily allocated to goodwill and intangible assets. Fluor issued €500 million of 1.75% senior notes due 2023 and used proceeds, in part, to repay acquisition-related borrowings and Stork debt.
Investing cash outflow included $402 million of partnership and joint-venture investments, including Fluor’s initial $350 million investment in the CFHI fabrication-yard venture; a further $140 million investment was targeted for Q3 2016. Operating cash flow improved partly because Q1 2015 included $306 million of payments for discontinued lead-business litigation. Q1 2016 operating cash flow was partly offset by working-capital changes.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance was provided in the supplied filing text. Management noted that low oil prices had affected award timing and execution on some projects, while mining customers continued to defer major investment decisions. Government revenue remained affected by reduced LOGCAP IV activity.
- Management described Energy, Chemicals & Mining as positioned for downstream, petrochemical and selected upstream opportunities. Stork’s revenue and profit may fluctuate seasonally, with first-quarter performance generally lower than later quarters.
- Risks include contract execution and cost overruns, award delays or cancellations, client payment defaults, commodity and foreign-exchange movements, competition and margin pressure, joint-venture performance, acquisition integration, litigation, cybersecurity, and limits on credit, bonding or letter-of-credit capacity. The filing said there were no material changes to previously disclosed risk factors.
- Outstanding performance guarantees had a stated maximum potential payment amount of $19.9 billion; the recognized liability was not material. Potential amounts payable beyond estimated contract completion costs were not estimable. Recorded contract-claim revenue was $36 million, with recovery considered probable by management.
- Fluor said it did not expect open litigation and claims to have a material adverse effect on consolidated financial position or results of operations. Tax audits could nevertheless produce outcomes materially different from recorded reserves.
Most important facts for investors to verify
- Whether new awards and project execution can offset weakness in commodity-linked markets, particularly mining and upstream energy.
- Whether backlog converts to revenue and profit as expected, including the large nuclear and government awards and the acquired Stork backlog.
- Stork integration, final purchase-price allocation, and the impact of acquisition-related debt and costs.
- Working-capital trends, cash conversion, liquidity availability and the planned additional CFHI investment.
- Exposure to performance guarantees, contract claims, litigation, tax audits and other project contingencies.