'Material Weaknesses'

Fluor CEO Carlos Hernandez noted discovery of "material weaknesses" in the firm's disclosure controls and procedures that are being addressed by more "standardization of project-level documentation and reporting" and improved employee training. 

"A few individuals did not live up to" company standards, he said. "While this was very-disappointing, I am confident that we have made the necessary changes to separate those individuals and prevent these problems from reoccurring."

He said two U.S. Army site projects at the center of the lump-sum charge controversy are set to finish in early 2021 and 2022.

Chief Financial Officer Joe Brennan "problem projects"" make up 10% of its backlog, with the remainder "generating operating cash flow."

The company also suspended all previously stated guidance for 2020 due to energy market volatility and global disruption from the COVID-19 pandemic, but said it will file quarter-one 2020 results next month and be up to date for others by year end. "We are having conversations with our clients on the best path forward to success in this environment and are providing notices asserting our rights under change of law and force majeure provisions," said Hernandez.

As a result of the review by a board-created independent committee and outside financial consultants, the firm said its energy & chemicals business group "will only pursue reimbursable or open-book lump-sum conversion engineering, procurement and construction prospects."

The unit reported a loss of $95 million in 2019 compared to a profit of $335 million in 2018 "as a result of charges associated with forecast revisions on certain projects,"  said Fluor. Segment revenue for 2019 was $5.8 billion, down from $7.7 billion in the previous year.

No Exit From Energy

"We're only going to be negotiating [contracts] in Energy & Chemicals," said the CEO. "We're not going to bid against anybody and our clients are receptive to that."

He added that "while our commodity-exposed clients are assessing their timeline as it relates to new final investment decisions, we still see a pipeline of prospects" that include a significant number of mid-sized reimbursable energy & chemicals projects.

Boeckmann acknowledged a reduced energy & chemicals market ahead but termed it "a very good thing. We have a great opportunity working with clients to have a significant backlog, but on a basis that we can perform against and we can be successful" for both the firm and customers.

 "Our clients have seen what's happened" in the sector, he said. "They've seen a number of our competitors exit, and we're still there. We're not leaving this industry, but we're going to play in it with a very, very different set of rules."

Hernandez pointed to projects that clients have already agreed to modify from lump-sum to reimbursable format. "Prospects in oil and gas are down right now," he said, "but I am not concerned about our ability to compete in that market."

Credit Suisse lead sector analyst Jamie Cook said in in an investor note that "this is a step in the right direction, although the market likely prefers zero fixed-price work under any circumstances or zero fixed-price on construction at least." She said Fluor "continues to make progress" on the sale of its AMECO equipment unit and is "realizing at least $100 million in cost savings."

Hernandez told investors and analysts that its much-watched $14-billion LNG Canada project in Kitimat, British Columbia "is moving forward, albeit impacted by COVID-19."  The project is about 27.5% complete but not in construction, he said, adding "we're comfortable with the progress that has been made to date. It is a lump-sum that we're not nervous about because it was negotiated."

The project had a major workforce reduction in mid-March, he explained, but staffing has recovered to pre-pandemic levels "and we expect to increase it to 2,500 on-site by the end of 2020 "safely and with continued focus on minimum infections."

Infrastructure Realities

Fluor reported boosted earnings and revenue in its mining and industrial unit based on "increased project execution" and "favorable resolution of a longstanding customer dispute" that it did not detail. But the firm reported a $244-million loss in its infrastructure and power group.

In its infrastructure business, Hernandez reiterated Fluor's planned exit from Europe and Australia markets, and a bigger focus "on select markets" in the U.S.

"We are further refining our approach to this market and will no longer pursue large scale projects for clients where there is a history of onerous contractual terms and inadequate program management." he said.

The comment was a likely reference to its past several years of travails on the multi-billion-dollar Purple Line light rail project in Maryland, on which the firm has a role in both its public-private concession and project design-build team.

After months of recent legal battles with the state over nearly $800 million in added costs and at least 2.5 years in schedule delay, both teams are in process of terminating their state contracts and exiting the project.

"While this was a disappointing outcome for this project, our project team exhausted all other options," said Hernandez. "The lack of resolution ... made our continued participation on this project unsustainable."

CFO Brennan said the project would be removed from backlog in its third-quarter reporting, removing about $500 million from the loss total.

Hernandez told analysts that while "obviously, we can't not bid competitively lump-sum [infrastructure] projects, we're only going to do it in a very, very selective way. We're still dealing with a legacy of infrastructure projects and we have some charges on those projects. But nothing has been signed since May 1, 2019 that does not meet our very selective criteria. And we've learned some lessons. We're not going to be bidding projects where we don't think that the client can properly manage the project."

Andrew Wittmann. senior industry analyst for Baird Equity Research, said in a Sept. 28 note that "Fluor's cash position positively surprised with operational/backlog updates very weak, but not incrementally worse than expected." He added that stricter bid criteria and weak end-markets impacting earnings power are "now our primary concern since the balance sheet is stronger than we'd expected and the cash burn is appearing more manageable."

'Back in Equilbrium'

Boeckmann added that Fluor's traditional approach to procurement risk management "wasn't successful ... in the previous few years because of optimism and lack of true risk assessment." He said with its current focus "we'll have a reliable backlog and one that we can bring to the bottom line."

The executive said management's push to "get us back in equilibrium on cash flow" enabled Fluor to reverse its previous intent last fall to sell its government business that with other asset sales, was set to bring in an estimated $1 billion. He said, "even as we stay in EPC in certain areas, we're going to be much more focused on ... value added services."

The government business unit not been impacted by the pandemic "at all," Hernandez said. "It's actually been doing very well."

Boeckmann said Fluor will unveil final results of its continuing strategic review by the "latter part" of fourth quarter 2020 in what he termed a "pretty significant" call with investors and analysts. He said the firm continues to cooperate with still-ongoing SEC and Justice Dept. probes, and could not say when they are set to end.

Fluor "continues to have substantial liquidity and dedicated employees who are ready to tackle current and future challenges," Hernandez told analysts.

"We, as well as others in the industry, have been pursuing a growth strategy in an increasingly risky environment," he said. "We were unrealistically optimistic in our pursuit and the way we chased projects to win. That clearly has changed."

Fluor 's share price rose about 2.5% at close on Sept. 25 to $9.59.