FLUOR CORPORATION - 10-Q Summary (Period Ended September 30, 2004)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Fluor Corporation, a global engineering, procurement, and construction company, for the period ended September 30, 2004. The company operates in five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power. The report highlights a strategic shift in the third quarter of 2004, moving the ICA Fluor Daniel joint venture results from the Power segment to the Oil & Gas segment.
Key Financial Metrics
| Metric ($ in millions) | Q3 2004 | Q3 2003 | 9 Months 2004 | 9 Months 2003 |
|---|---|---|---|---|
| Revenues | $2,362.7 | $2,120.8 | $6,640.4 | $6,441.2 |
| Net Earnings | $47.3 | $44.1 | $138.8 | $106.0 |
| Diluted EPS | $0.57 | $0.55 | $1.68 | $1.32 |
| Operating Profit | $95.5 | $97.5 | $294.0 | $291.3 |
| Cash from Operations (9mo) | $17.3 | ($135.1) | $17.3 | ($135.1) |
| Cash & Equivalents | $561.5 | $578.8 | $561.5 | $578.8 |
| Long-Term Debt | $347.6 | $44.7 | $347.6 | $44.7 |
| Backlog (End of Period) | $13,745.9 | $10,303.8 | $13,745.9 | $10,303.8 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11% in Q3 and 3% for the nine months ended September 30, 2004, compared to 2003. This was driven by the Oil & Gas segment (up 74% in Q3) and the Government segment (up 31% in Q3), offset by declines in Industrial & Infrastructure and Power.
- Profitability: Net earnings rose 7% in Q3 and 31% for the nine-month period. The nine-month 2003 comparison included a $13.1 million loss on disposal of discontinued operations and a $10.4 million charge for a change in accounting principle, which were absent in 2004.
- Segment Shifts: The Power segment reported an operating loss of $10.1 million in Q3 2004 due to unexpected costs on a waste-coal power plant and a general decline in power plant construction demand. Conversely, the Government segment saw significant growth due to work in Iraq and acquisitions (Del-Jen, Trend Western).
- Debt Structure: Long-term debt increased significantly to $347.6 million from $44.7 million at year-end 2003, primarily due to the issuance of $330 million in convertible senior notes in February 2004.
Guidance, Outlook, Risks, and Unusual Items
- Backlog: Consolidated backlog increased 33% to $13.7 billion, with new awards up 27% for the nine months ended September 30, 2004. Approximately 60% of backlog relates to international projects.
- Hamaca Project Contingency: A major risk involves the Hamaca Crude Upgrader project in Venezuela. The company has deferred $253.2 million in costs related to change orders (soil conditions, labor agreements, national strike) pending arbitration. While the company believes these are recoverable, failure to recover could result in materially reduced profits or losses.
- Legal Proceedings: The company settled the Murrin Murrin dispute in Australia for approximately $120 million, which was funded by insurance and had no material financial impact. Arbitration is ongoing regarding the Rabigh Power Plant (vs. GE) and the Dearborn Industrial Project.
- Accounting Changes: The Emerging Issues Task Force (EITF) reached a consensus on contingently convertible debt (Co-Cos). If applied retroactively, diluted EPS for the nine months ended September 30, 2004, would be reduced to $1.62 from the reported $1.68.
- Auditor Independence: The filing discloses that Ernst & Young's foreign affiliates in China, Taiwan, and Brazil performed non-audit work (tax payments, check writing) that raised independence questions. The company and auditor concluded these were immaterial and administrative, and the services have been discontinued.
Investor Verification Checklist
- Hamaca Recovery: Verify the status of the $253.2 million in deferred costs and the likelihood of recovery from the Venezuelan consortium.
- Power Segment Viability: Assess the long-term outlook for the Power segment given the reported operating loss and the dissolution of the Duke/Fluor Daniel partnership.
- Convertible Debt Impact: Review the terms of the $330 million convertible notes and the potential dilution impact once the EITF 04-8 consensus is fully implemented in Q4 2004.
- Government Contract Stability: Evaluate the sustainability of the revenue growth in the Government segment, which is heavily reliant on Iraq projects and acquisitions.
- Liquidity Needs: Monitor cash flow requirements related to the Hamaca project subcontractor close-outs and the potential need for short-term borrowings.