Fluor Corporation — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. Fluor provides engineering, procurement, construction, project management and related services through Energy & Chemicals, Mining/Industrial/Infrastructure & Power, Government, and Diversified Services. Segment presentation was changed in 2018, with 2017 segment figures recast.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $4.824 billion | $4.836 billion |
| Gross profit (revenue less cost of revenue) | $57.8 million; 1.2% margin | $150.0 million; 3.1% margin |
| Segment profit | $52.3 million | $133.2 million |
| Loss before taxes | $9.1 million | Earnings before taxes of $93.4 million |
| Net earnings attributable to Fluor | Loss of $17.6 million; diluted loss per share $0.13 | Earnings of $60.6 million; diluted EPS $0.43 |
| Operating cash flow | Use of $136.0 million | Provided $270.2 million |
| Cash and cash equivalents | $1.686 billion | $1.804 billion at year-end |
| Current and noncurrent marketable securities | $142.5 million | $274.8 million at year-end |
| Short-term borrowings and long-term debt | $1.636 billion | $1.619 billion at year-end |
Cash plus marketable securities totaled about $1.8 billion at quarter-end. However, $583 million of cash was held by consolidated VIEs and may not be readily available for general purposes. Current liabilities rose to $4.078 billion from $3.574 billion; total equity declined to $3.129 billion from $3.492 billion. The company said cash, operating cash generation and unused credit capacity should support operations for at least 12 months, and reported compliance with debt covenants. Letters of credit and borrowings totaling $1.7 billion were outstanding under committed and uncommitted credit lines; the committed facilities total $3.5 billion.
Material changes and operating drivers
- Profit deteriorated sharply despite nearly flat revenue. Q1 2018 earnings included approximately $96 million of after-tax charges from estimated cost growth on fixed-price projects, versus approximately $22 million in Q1 2017. A $125 million forecast cost increase on a gas-fired power plant project drove a $0.69-per-share impact.
- Mining, Industrial, Infrastructure & Power revenue fell 34% to $910 million and the segment recorded a $144 million loss, primarily due to the power-plant cost revision, reduced power-project activity and higher NuScale costs. Energy & Chemicals segment profit rose to $106 million despite lower revenue. Government revenue increased 73% to $1.327 billion, mainly on Puerto Rico power-restoration work. Diversified Services revenue grew 13%, but segment profit fell 17%.
- New awards were $2.5 billion versus $2.3 billion. Backlog was $29.1 billion, down from $41.6 billion a year earlier, principally following removal of two Westinghouse nuclear projects and work performed exceeding awards. Remaining unsatisfied performance obligations were $26.5 billion; these are not identical to backlog.
- Operating cash flow swung to an outflow, with working-capital increases in receivables and contract assets associated principally with Puerto Rico project execution. Investing activities provided $66.9 million, while financing activities used $58.0 million. Capital expenditures were $65.1 million; dividends declared were $0.21 per share.
Outlook, risks and unusual items
- Fluor said it is exiting the gas-fired power plant market and does not intend to bid new-build engineering, construction and procurement work after existing contracts are completed. The company attributed $93 million of Q1 2018 after-tax losses to that business and presented adjusted earnings excluding those losses as a non-GAAP measure.
- Management noted delays in client final investment decisions, while reporting renewed mining-sector interest in bauxite, copper and gold. No specific consolidated earnings or revenue guidance is provided in the supplied filing text.
- ASC Topic 606 was adopted using the modified retrospective method. The company recorded a $339 million cumulative reduction to retained earnings at January 1, 2018, primarily reflecting a change in contract performance-obligation accounting. Prior-period results were not restated, limiting direct comparability; adoption increased Q1 net earnings by $1.3 million relative to prior guidance.
- The Q1 effective tax rate was negative 33.2%, affected by higher foreign tax rates and inability to offset losses in some jurisdictions against income elsewhere. Tax Act accounting remained provisional; the company had not determined its GILTI accounting policy and expensed its current-quarter estimate.
- Fluor disclosed a $13 billion maximum potential amount under performance guarantees, though the recorded liability was not material and actual excess payments were not estimable. Santos is seeking approximately AUD 1.47 billion in damages over an Australian project; Fluor disputes the claims, is defending the case, and recorded no charge because it did not consider a loss probable. The company also reported $134 million of recognized claim revenue in contract assets.
- Other stated risks include project cost overruns and execution, award delays or cancellations, client payment delays, litigation and claims recovery, foreign-exchange movements, government-contract audits, and credit or bonding capacity. The filing reported no material changes to its risk factors or market-risk disclosures.
Important facts for investors to verify
- Progress and remaining cost exposure on the fixed-price gas-fired power project, and Fluor’s execution of its planned exit from that market.
- Recoverability and timing of collections for Westinghouse-related receivables, including $66 million tied to V.C. Summer and $2 million to Plant Vogtle for pre-bankruptcy services.
- Cash conversion and working-capital needs on Puerto Rico restoration work; also distinguish available corporate cash from cash held in VIEs.
- Backlog quality, conversion into revenue, cancellation or deferral risk, and the distinction between backlog and remaining performance obligations.
- Outcome of the Santos litigation, claims and back-charge recoveries, performance guarantees, and provisional Tax Act estimates.