Fluor Corporation (NYSE: FLR) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 31, 2019. Unaudited results. Unless stated otherwise, amounts are U.S. dollars. The company reclassified its government and AMECO businesses as discontinued operations and recast prior-period segment information; continuing-operations comparisons below exclude the businesses presented as discontinued.
Business context and results
Fluor provides engineering, procurement, construction and related services. In Q3, management committed to sell substantially all government and AMECO equipment operations, expecting completion within one year, and reorganized reporting into five segments. Fluor retained two fixed-price government projects and some small AMECO components.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.94 billion | $3.84 billion | $10.62 billion | $11.27 billion |
| Gross profit (loss), calculated as revenue less cost of revenue | $68 million | $187 million | $(556) million | $309 million |
| Continuing-operations pretax earnings (loss) | $(281) million | $111 million | $(1.075) billion | $140 million |
| Continuing-operations net earnings (loss) attributable to Fluor | $(782) million | $69 million | $(1.424) billion | $70 million |
| Total net earnings (loss) attributable to Fluor, including discontinued operations | $(742) million | $77 million | $(1.355) billion | $175 million |
| Diluted EPS from continuing operations | $(5.57) | $0.49 | $(10.17) | $0.49 |
Q3 revenue grew 2% year over year, led by Mining & Industrial, while nine-month revenue fell 6%. Calculated gross margin was about 1.7% in Q3 versus 4.9% a year earlier, and negative 5.2% for the first nine months versus positive 2.7% in 2018. Segment profit was $58 million in Q3 versus $173 million; the nine-month segment loss was $537 million versus $277 million of profit.
Cash flow, liquidity and debt
- Cash from operations was $67 million for the first nine months, compared with $11 million used in the prior-year period. Management attributed the improvement to working-capital inflows; it cautioned that liquidity would be needed to fund contract liabilities arising from project loss provisions and forecast adjustments.
- Cash and cash equivalents were $1.805 billion at September 30, 2019; marketable securities were $48 million. Cash plus marketable securities totaled about $1.9 billion. Of reported cash, $477 million was held by consolidated variable interest entities and was not necessarily available for general purposes.
- Cash from investing activities was $75 million; cash used in financing was $87 million, including $89 million of dividends paid. Capital expenditures were $140 million.
- Balance-sheet debt included $1.637 billion of long-term debt and $45 million of short-term borrowings. The filing also reports $48 million of other borrowings including noncurrent amounts. Fluor had $1.5 billion of letters of credit and borrowings outstanding under committed and uncommitted facilities; its two committed facilities total $3.5 billion and mature in February 2022. The company said it was compliant with debt covenants.
- Management believed cash, operating cash flow and unused credit capacity were sufficient for operating needs for at least the next 12 months. The company announced that its quarterly dividend would fall from $0.21 to $0.10 per share beginning with the next declaration.
Material changes, outlook and risks
- Project losses and impairments: Nine-month project charges totaled $911 million across Energy & Chemicals, Infrastructure & Power and Other. Separately, $388 million was recorded for impairment, restructuring and exit costs. This included $225 million of impairment on the CFHI joint venture, $31 million on Sacyr Fluor, and $34 million on Stork customer-relationship intangibles. No goodwill impairment was identified.
- Project-specific exposure: Nine-month charges included $240 million on a fixed-price offshore project and $87 million on downstream projects and an upstream scope reduction in Energy & Chemicals; $135 million on substantially complete power projects and $55 million on infrastructure projects; and $253 million on the Radford project plus $59 million on the Warren project in Other. Fluor said further adverse results were possible if cost forecasts or recovery of unapproved change orders fell short.
- Tax charge: The company recorded a $546 million valuation allowance against deferred tax assets in Q3 after considering evidence that included a three-year cumulative loss. Income tax expense was $490 million in Q3 despite the pretax loss; the filing cites foreign losses without recognizable tax benefits and foreign tax rates among the factors affecting the effective rate.
- Restructuring: Fluor estimated approximately $250 million of total restructuring and exit costs, including about $100 million severance, $60 million asset impairments, $80 million entity liquidation costs and $10 million other costs. Substantial completion was expected in 2020; additional activities could be approved.
- Awards and backlog: New awards were $2.6 billion in Q3 and $7.7 billion for nine months, down from $6.3 billion and $13.5 billion, respectively. Continuing-operations backlog was $30.3 billion at September 30, 2019, versus $30.0 billion a year earlier; 62% was fixed-price, lump-sum or guaranteed-maximum work, up from 37%. Remaining unsatisfied performance obligations were $28.0 billion, excluding $4.0 billion tied to discontinued operations. Backlog and obligations may be cancelled, deferred or adjusted.
- Portfolio and operations: The sale plan is a strategic shift; nine-month discontinued-operations revenue was $2.39 billion and net earnings were $77 million, including settlement-related items. The filing provides no numerical consolidated earnings guidance. Management described changes to bidding and pursuit criteria, including criteria for Energy & Chemicals lump-sum bids and a North America focus for Infrastructure.
- Contingencies: Outstanding performance guarantees had a stated maximum potential amount of $19 billion, representing remaining work to be performed by or for third parties; potential payments beyond estimated completion costs were not estimable, and the recorded guarantee liability was not material. Santos is seeking about AUD 1.47 billion in litigation related to an Australian project; Fluor disputes the claims and said a loss was not considered probable. The company also reported $205 million of claim revenue in contract assets and $108 million of aged and disputed receivables on a Middle East project.
- Other disclosed risks include project cost and schedule estimation, client payment and change-order recovery, fixed-price contract exposure, foreign exchange, project cancellations, joint-venture performance, litigation and tax-asset realizability. The filing reported no material change to previously disclosed risk factors or market-risk disclosures.
Most important facts for investors to verify
- Progress, timing and proceeds of the planned government and AMECO divestitures, and the final assets and liabilities transferred.
- Updated cost-to-complete forecasts and change-order recoveries for Radford, Warren, the offshore and downstream projects, and the power and infrastructure projects.
- Cash availability after accounting for VIE-held balances, contract execution needs, credit-facility usage and the $19 billion guarantee exposure.
- Whether the $546 million deferred-tax-asset valuation allowance changes and whether Fluor can realize remaining deferred tax assets.
- Collections of the $108 million disputed project receivable and $205 million of recognized claim revenue, along with the outcome of material litigation and disputes.
- Whether new awards replenish backlog, and whether the higher fixed-price share of backlog increases future margin and execution risk.