Fluor Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; comparisons are primarily with FY 2012. Fluor is a global engineering, procurement, construction, maintenance and project-management provider operating through Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. This annual filing also reports quarterly results, including Q4.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $27.35 billion | $27.58 billion |
| Earnings before taxes | $1.18 billion | $734 million |
| Net earnings attributable to Fluor | $668 million | $456 million |
| Diluted EPS | $4.06 | $2.71 |
| Cash provided by operating activities | $789 million | $628 million |
| Cash and cash equivalents | $2.28 billion | $2.15 billion |
| Working capital | $2.60 billion | $2.21 billion |
| Backlog at year-end | $34.9 billion | $38.2 billion |
Reported gross margin was approximately 5.0% of revenue versus 3.2% in 2012; pretax margin was approximately 4.3% versus 2.7%. The effective tax rate rose to 30.1% from 22.1%. Cash used in investing activities was $235 million and cash used in financing was $370 million. Capital expenditures were $289 million. Cash plus current and noncurrent marketable securities totaled $2.7 billion.
Debt-to-capital was 12.3% at year-end, down from 13.9%. Fluor reported $4.6 billion of committed and uncommitted credit lines, $3.6 billion of unused capacity, and compliance with debt covenants. The $500 million 3.375% senior notes mature in 2021; $18 million of convertible notes and $11 million of other borrowings were classified as current at year-end.
Material changes versus FY 2012
- Revenue was essentially flat, while pretax earnings rose 61% and diluted EPS increased to $4.06 from $2.71. The improvement principally reflected stronger Oil & Gas execution and the absence of the prior-year $416 million Greater Gabbard project charge.
- Oil & Gas revenue increased 21% to $11.5 billion and segment profit rose 32% to $441 million. Industrial & Infrastructure revenue declined 16% to $11.1 billion, while segment profit increased to $476 million, largely because 2012 included the Greater Gabbard charge.
- Government revenue declined 17% to $2.75 billion, mainly as LOGCAP IV work in Afghanistan and ARRA-funded activity at Savannah River wound down. Segment profit increased to $161 million, including $57 million of favorable U.S. government resolutions in Q4.
- Power revenue increased 65% to $1.39 billion and the segment returned to a modest profit of $12 million from a $17 million loss. Global Services revenue declined 10% to $612 million and segment profit edged down to $120 million.
- New awards fell to $25.1 billion from $27.1 billion. Backlog decreased 8.6%; mining-project cancellations and lower mining awards contributed, while Oil & Gas backlog increased to $20.0 billion. The 2013 backlog included $983 million of newly counted unfunded government awards, following a change in reporting practice.
For Q4 2013, revenue was $6.29 billion, pretax earnings were $268 million and net earnings attributable to Fluor were $167 million. Q4 2012 had revenue of $7.02 billion, a pretax loss of $60 million and a Fluor-attributable loss of $4 million, reflecting the Greater Gabbard charge.
Outlook, commentary, risks and unusual items
- No specific company-wide revenue or EPS guidance is provided in the filing. Management expected to perform approximately 54% of year-end backlog during 2014 and considered operating cash generation, cash balances and unused credit capacity sufficient for at least the next 12 months. Backlog may be cancelled, deferred or revised and is not a guarantee of future revenue or profit.
- Management described continued competitive pressure on margins. It noted improving oil-and-gas upstream and petrochemical markets, but uncertain timing and potentially prolonged weakness in mining and metals investment, and reduced Government-segment work as U.S. bases closed in Afghanistan. Power demand remained relatively weak.
- About 80% of backlog was cost-reimbursable and 20% fixed-price, lump-sum or guaranteed-maximum. Fixed-price exposure creates risk of unrecoverable overruns, delays, liquidated damages and losses. Percentage-of-completion estimates, claims, project costs and customer collections are significant judgment areas.
- Q4 2013 included $57 million of pretax favorable government-related resolutions: $31 million on reimbursability of costs, $11 million from a court ruling and $15 million from closeout matters. These items are unusual and should be distinguished from recurring project performance.
- The Greater Gabbard dispute and related counterclaim were resolved in 2013 without material earnings impact; the $416 million charge was recorded in 2012. Separate St. Joe Minerals litigation remains unresolved: Fluor is appealing judgments totaling $358.5 million, including punitive damages, and has not accrued a loss because management did not consider a loss probable. An adverse outcome or unsuccessful indemnity recovery could materially affect earnings.
- Maximum potential payments under outstanding performance guarantees were estimated at $7.8 billion, although the recorded liability was not material. Fluor also cited international political and security exposure, government funding and contract risks, litigation, tax uncertainty, foreign exchange, subcontractor performance and project execution as material risks.
Important facts for investors to verify
- Whether backlog conversion, new awards and cancellations—particularly in mining, Oil & Gas and Government—support future revenue; assess the effect of the $983 million unfunded-government backlog inclusion.
- How much of 2013 earnings growth reflects recurring project execution versus the $57 million government resolution and the comparison with the 2012 Greater Gabbard charge.
- Current status, potential exposure and indemnity recovery prospects in St. Joe Minerals litigation, and developments in performance guarantees and other contingencies.
- Cash conversion and working-capital trends, including customer payment timing, project advances and the concentration of cash held internationally.
- Exposure to fixed-price project overruns, contract claims, mining-market weakness, Afghanistan drawdown and government funding changes.