Fluor Corp. will sell its construction equipment rental company AMECO and government services business, pull cash from surplus real estate and non-core investments and further toughen bid scrutiny to generate what it says would be more than $1 billion in proceeds to restore an ailing bottom line, firm executives said on Sept. 24 in announcing results of a strategic review begun earlier this year.
The firm also said it would reduce its next quarterly dividend to 10 cents per share, an estimated 52% reduction, following losses in its first two quarters.
Most of the changes had been generally anticipated by stock market analysts. The firm does not see further losses, but did not predict when it would return to profitability.
CFO Mark Steuert noted charges expected in results for its third quarter that ended July 31, which included two fixed-price U.S. Army projects with higher costs, on which the firm is pursuing claims. The firm will release its next quarter results on Oct. 30.
He saw key improvements on a previously problematic offshore power project and said charges will be less than the previous quarter, but also that backlog growth will be "flat," down from a growth estimate provided earlier in the year.
Corporate Scrubbing
The company said the strategic review evaluated the contractor's "entire portfolio of businesses," including its Stork industrial unit acquired in 2015, its COOEC-Fluor Heavy Industries business and the small nuclear reactor technology firm NuScale.
Fluor will retain the businesses but emphasized new efforts to push better financial performance and, related to NuScale, investments from outsiders. "Recent milestones achieved by NuScale have generated additional investor interest that is expected to offset 2020 funding requirements," Fluor said, noting pending federal approval of its technology.
“With this review behind us, we are focusing more than ever before on long-term value creation and operational excellence,” said CEO Carlos Hernandez, elevated to the role earlier this year.
Hernandez said the divestment decisions, which include financial stakes in P3 projects that he did not identify, were "difficult" but represent businesses that are non-core to the corporation.
The CEO said Fluor's operational review led to organization restructuring, including naming Mark Fields as global energy and chemicals president and Terry Towle in the same role for infrastructure and power, based in North America.
Go and No-Go
Hernandez emphasized the firm's tougher scrutiny of bid "pursuit criteria" and reductions in fixed price work, adding that "the company will shift to a model in which business groups have direct control over the functions that support operations" to speed decision making "and drive greater accountability within the businesses."
He also noted more direct C-suite, and CEO, involvement in risk management, with formation of a new board risk committee that will report directly to Hernandez.
Even with Fluor's decision to limit fixed price work pursuits, analysts wondered about risks in its upcoming Rovuma LNG megaproject in Mozambique for ExxonMobil, estimated at $15 billion.
Hernandez said the firm, in a joint venture, is negotiating with the LNG client to "de-risk the project as much as possible," contending that the owner "recognized that the past model did not work."
UBS analyst Steven Fisher said the $1 billion proceeds total "is substantial and should further strengthen the balance sheet enhancing counterparty confidence ... and mitigating cost overrun risk on LNG Canada or other fixed price project."
Hernandez did not detail contract or project changes, nor prospective buyers for the businesses to be sold. He said government services unit project work will continue after its sale, which could occur in early 2020.
A source with knowledge of Fluor speculated that Parsons Corp. could be a buyer.
The government services exit would affect Fluor work for the U.S. Energy Dept., for which it has been the lead contractor management partner at the Savannah River nuclear site in South Carolina for about a decade. A recent contract extension could keep the firm in that role until 2022. The firm also has operations at other DOE sites
Fluor also is a contractor in the US Army's LOGCAP military support program, just winning a contract in Africa but losing its bid for a large one in Afghanistan.
Great Expectations
Steuert said Fluor's new bidding scrutiny will give the firm "expectations for better margins," although he acknowledged "it will take some time for that to roll through." He said he was "very comfortable" with risk issues in its backlog, after the firm's extensive review, "except for the projects talked about."
The restructuring, including office closures and layoffs not detailed on the Sept. 24 call, are set to cut $100 million in overhead.
Jamie Cook, a Credit Suisse managing director and lead industry sector analyst, predicts that "savings will begin in 2020 and gain traction throughout the year. " She adds a forecast that after the divestitures and other cost cuts, Fluor "can achieve [net earnings] in the $500-700 million range."
Hernandez said the "new Fluor will be an attractive investment with a strong market position, best in class engineering and an industry leading reputation among clients. We are very focused on changing the course of the company."
Fluor also noted the board election of Thomas Leppert, former Turner Corp. CEO and Austin Industries chairman, and David Constable, a former company president and 29-year Fluor veteran before leaving to become CEO of South Africa energy company Sasol, a key client of the contractor.
Peter Fluor, a director since 1984, said he is leaving the board.
Andrew Wittmann, senior industry sector analyst for R.W. Baird, in a Sept. 24 research note, noted the key changes to "help strengthen the balance sheet," but said the amount of future "earnings power and cash burn are unknowable with nearly all fixed-price backlog bid under prior risk review processes," adding that "potential challenges with the project portfolio ... may remain so for some time."
Cook also raised a concern about broader competitive impacts for Fluor ahead "given the risk profile associated with [fixed-price] work and the industry's inability to consistently execute."
