FLUOR CORP - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-16129
FLUOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 33-0927079 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
incorporation or organization) | Identification No.) | ||
6700 Las Colinas Boulevard | |||
Irving, | Texas | 75039 | |
(Address of principal executive offices) | (Zip Code) | ||
469-398-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | FLR | New York Stock Exchange |
Preferred Stock Purchase Rights | FLR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 30, 2020, 140,620,842 shares of the registrant’s common stock, $0.01 par value, were outstanding.
FLUOR CORPORATION
FORM 10-Q
TABLE OF CONTENTS | PAGE | ||
1
Glossary of Terms
The definitions and abbreviations set forth below apply to the indicated terms used throughout this filing.
Abbreviation/Term | Definition |
2019 10-K | Annual Report on Form 10-K for the year ended December 31, 2019 |
2019 Period | Six months ended June 30, 2019 |
2019 Quarter | Three months ended June 30, 2019 |
2020 Period | Six months ended June 30, 2020 |
2020 Quarter | Three months ended June 30, 2020 |
AOCI | Accumulated other comprehensive income (loss) |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Cont Ops | Continuing operations |
Corporate G&A | Corporate general and administrative expense |
COVID-19 | Coronavirus pandemic of 2020 |
Disc Ops | Discontinued operations |
DOE | U.S. Department of Energy |
EPC | Engineering, procurement and construction |
EPS | Earnings per share |
Exchange Act | Securities Exchange Act of 1934 |
GAAP | Accounting principles generally accepted in the United States |
ICFR | Internal control over financial reporting |
NCI | Noncontrolling interests |
NM | Not meaningful |
NuScale | NuScale Power, LLC |
OCI | Other comprehensive income (loss) |
Q1 2020 10-Q | Quarterly Report on Form 10-Q for the three months ended March 31, 2020 |
Q2 2020 10-Q | Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020 |
RSU | Restricted stock units |
RUPO | Remaining unsatisfied performance obligations |
SEC | Securities and Exchange Commission |
Stork | Stork Holding B.V. and subsidiaries; Acquired by Fluor in 2016 |
VDI | Value Driver Incentive |
VIE | Variable interest entity |
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Revenue | $ | 4,090,993 | $ | 4,146,404 | $ | 8,209,549 | $ | 8,280,016 | |||||||
Cost of revenue | 4,023,530 | 4,577,607 | 8,080,690 | 8,648,467 | |||||||||||
Other (income) and expenses | |||||||||||||||
Corporate general and administrative expense | 39,737 | 49,932 | 25,685 | 108,553 | |||||||||||
Impairment, restructuring and other exit costs | 5,058 | 26,671 | 302,662 | 54,039 | |||||||||||
Interest expense | 17,091 | 18,876 | 35,414 | 37,506 | |||||||||||
Interest income | (5,302 | ) | (14,816 | ) | (17,354 | ) | (27,709 | ) | |||||||
Total cost and expenses | 4,080,114 | 4,658,270 | 8,427,097 | 8,820,856 | |||||||||||
Earnings (loss) from Cont Ops before taxes | 10,879 | (511,866 | ) | (217,548 | ) | (540,840 | ) | ||||||||
Income tax expense (benefit) | 31,085 | (75,757 | ) | (35,747 | ) | (60,500 | ) | ||||||||
Net earnings (loss) from Cont Ops | (20,206 | ) | (436,109 | ) | (181,801 | ) | (480,340 | ) | |||||||
Net earnings (loss) from Disc Ops | 1,944 | (16,591 | ) | (92,911 | ) | (17,405 | ) | ||||||||
Net earnings (loss) | (18,262 | ) | (452,700 | ) | (274,712 | ) | (497,745 | ) | |||||||
Less: Net earnings (loss) attributable to NCI from Cont Ops | 6,728 | (38,679 | ) | 16,237 | (14,820 | ) | |||||||||
Net earnings (loss) attributable to Fluor Corporation from Cont Ops | (26,934 | ) | (397,430 | ) | (198,038 | ) | (465,520 | ) | |||||||
Net earnings (loss) attributable to Fluor Corporation from Disc Ops | 1,944 | (16,591 | ) | (92,911 | ) | (17,405 | ) | ||||||||
Net earnings (loss) attributable to Fluor Corporation | $ | (24,990 | ) | $ | (414,021 | ) | $ | (290,949 | ) | $ | (482,925 | ) | |||
Basic earnings (loss) per share attributable to Fluor Corporation | |||||||||||||||
Net earnings (loss) from Cont Ops | $ | (0.19 | ) | $ | (2.84 | ) | $ | (1.41 | ) | $ | (3.33 | ) | |||
Net earnings (loss) from Disc Ops | 0.01 | (0.11 | ) | (0.66 | ) | (0.12 | ) | ||||||||
Net earnings (loss) | $ | (0.18 | ) | $ | (2.95 | ) | $ | (2.07 | ) | $ | (3.45 | ) | |||
Diluted earnings (loss) per share attributable to Fluor Corporation | |||||||||||||||
Net earnings (loss) from Cont Ops | $ | (0.19 | ) | $ | (2.84 | ) | $ | (1.41 | ) | $ | (3.33 | ) | |||
Net earnings (loss) from Disc Ops | 0.01 | (0.11 | ) | (0.66 | ) | (0.12 | ) | ||||||||
Net earnings (loss) | $ | (0.18 | ) | $ | (2.95 | ) | $ | (2.07 | ) | $ | (3.45 | ) | |||
The accompanying notes are an integral part of these financial statements.
3
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
UNAUDITED
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net earnings (loss) | $ | (18,262 | ) | $ | (452,700 | ) | $ | (274,712 | ) | $ | (497,745 | ) | ||||
OCI, net of tax: | ||||||||||||||||
Foreign currency translation adjustment | 31,072 | (14,536 | ) | (80,029 | ) | 27,660 | ||||||||||
Ownership share of equity method investees’ OCI | (10,654 | ) | (2,465 | ) | (18,826 | ) | (4,787 | ) | ||||||||
Defined benefit plan adjustments | 955 | 2,039 | 2,001 | 4,103 | ||||||||||||
Unrealized gain (loss) on derivative contracts | 1,765 | 2,238 | (3,705 | ) | 5,695 | |||||||||||
Total OCI, net of tax | 23,138 | (12,724 | ) | (100,559 | ) | 32,671 | ||||||||||
Comprehensive income (loss) | 4,876 | (465,424 | ) | (375,271 | ) | (465,074 | ) | |||||||||
Less: Comprehensive income (loss) attributable to NCI | 9,149 | (38,957 | ) | 14,441 | (14,613 | ) | ||||||||||
Comprehensive income (loss) attributable to Fluor Corporation | $ | (4,273 | ) | $ | (426,467 | ) | $ | (389,712 | ) | $ | (450,461 | ) | ||||
The accompanying notes are an integral part of these financial statements.
4
FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(in thousands, except share and per share amounts) | June 30, 2020 | December 31, 2019 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents ($547,487 and $392,772 related to VIEs) | $ | 1,969,593 | $ | 1,997,199 | ||||
Marketable securities ($66 related to VIEs in both periods) | 12,711 | 7,262 | ||||||
Accounts and notes receivable, net ($245,081 and $329,548 related to VIEs) | 1,146,761 | 1,217,464 | ||||||
Contract assets ($266,485 and $294,116 related to VIEs) | 1,069,507 | 1,238,173 | ||||||
Other current assets ($25,943 and $32,271 related to VIEs) | 459,979 | 389,565 | ||||||
Current assets held for sale | 368,835 | 517,100 | ||||||
Total current assets | 5,027,386 | 5,366,763 | ||||||
Noncurrent assets | ||||||||
Property, plant and equipment, net ($35,004 and $29,492 related to VIEs) | 568,606 | 594,826 | ||||||
Goodwill | 322,652 | 508,415 | ||||||
Investments | 528,251 | 600,814 | ||||||
Deferred taxes | 68,225 | 62,688 | ||||||
Deferred compensation trusts | 309,255 | 341,235 | ||||||
Other assets ($43,218 and $45,425 related to VIEs) | 416,399 | 491,917 | ||||||
Total noncurrent assets | 2,213,388 | 2,599,895 | ||||||
Total assets | $ | 7,240,774 | $ | 7,966,658 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable ($414,453 and $501,525 related to VIEs) | $ | 1,428,785 | $ | 1,546,840 | ||||
Short-term borrowings | 53,102 | 38,728 | ||||||
Contract liabilities ($262,786 and $232,160 related to VIEs) | 1,015,385 | 1,157,788 | ||||||
Accrued salaries, wages and benefits ($31,975 and $31,178 related to VIEs) | 570,416 | 609,094 | ||||||
Other accrued liabilities ($65,598 and $21,088 related to VIEs) | 475,113 | 470,350 | ||||||
Current liabilities related to assets held for sale | 62,278 | 82,322 | ||||||
Total current liabilities | 3,605,079 | 3,905,122 | ||||||
Long-term debt | 1,654,831 | 1,651,739 | ||||||
Deferred taxes | 74,787 | 83,295 | ||||||
Other noncurrent liabilities ($9,486 and $11,366 related to VIEs) | 675,183 | 742,410 | ||||||
Contingencies and commitments | ||||||||
Equity | ||||||||
Shareholders’ equity | ||||||||
Preferred stock — authorized 20,000,000 shares ($0.01 par value); none issued | — | — | ||||||
Common stock — authorized 375,000,000 shares ($0.01 par value); issued and outstanding — 140,565,020 and 140,174,400 shares in 2020 and 2019, respectively | 1,403 | 1,399 | ||||||
Additional paid-in capital | 175,089 | 165,314 | ||||||
AOCI | (478,636 | ) | (379,873 | ) | ||||
Retained earnings | 1,393,866 | 1,700,912 | ||||||
Total shareholders’ equity | 1,091,722 | 1,487,752 | ||||||
NCI | 139,172 | 96,340 | ||||||
Total equity | 1,230,894 | 1,584,092 | ||||||
Total liabilities and equity | $ | 7,240,774 | $ | 7,966,658 | ||||
The accompanying notes are an integral part of these financial statements.
5
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
Six Months Ended June 30, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
OPERATING CASH FLOW | ||||||||
Net earnings (loss) | $ | (274,712 | ) | $ | (497,745 | ) | ||
Adjustments to reconcile net earnings (loss) to operating cash flow: | ||||||||
Impairment expense - Cont Ops | 297,604 | 39,115 | ||||||
Impairment expense - Disc Ops | 100,000 | — | ||||||
Depreciation | 54,540 | 87,871 | ||||||
Amortization of intangibles | 2,381 | 9,043 | ||||||
(Earnings) loss from equity method investments, net of distributions | 1,216 | 7,891 | ||||||
Loss on sale of investment | 10,780 | — | ||||||
(Gain) loss on sales of property, plant and equipment | (2,575 | ) | (3,552 | ) | ||||
Amortization of stock-based awards | 9,356 | 29,803 | ||||||
Deferred compensation trust | 10,881 | (34,412 | ) | |||||
Deferred compensation obligation | (12,486 | ) | 36,593 | |||||
Deferred taxes | (17,424 | ) | (127,665 | ) | ||||
Net retirement plan accrual (contributions) | (7,234 | ) | (1,827 | ) | ||||
Changes in assets and liabilities | (115,170 | ) | 541,543 | |||||
Other | 6,931 | 4,777 | ||||||
Operating cash flow | 64,088 | 91,435 | ||||||
INVESTING CASH FLOW | ||||||||
Purchases of marketable securities | (12,495 | ) | (23,409 | ) | ||||
Proceeds from the sales and maturities of marketable securities | 6,995 | 164,964 | ||||||
Capital expenditures | (58,959 | ) | (100,840 | ) | ||||
Proceeds from sales of property, plant and equipment | 24,348 | 25,179 | ||||||
Investments in partnerships and joint ventures | (24,022 | ) | (27,056 | ) | ||||
Other | 4,534 | 5,164 | ||||||
Investing cash flow | (59,599 | ) | 44,002 | |||||
FINANCING CASH FLOW | ||||||||
Dividends paid | (28,720 | ) | (59,324 | ) | ||||
Other borrowings | 20,567 | 12,637 | ||||||
Distributions paid to NCI | (10,831 | ) | (15,572 | ) | ||||
Capital contributions by NCI | 39,520 | 7,821 | ||||||
Taxes paid on vested restricted stock | (1,313 | ) | (3,572 | ) | ||||
Other | (1,435 | ) | 201 | |||||
Financing cash flow | 17,788 | (57,809 | ) | |||||
Effect of exchange rate changes on cash | (49,883 | ) | 14,911 | |||||
Increase (decrease) in cash and cash equivalents | (27,606 | ) | 92,539 | |||||
Cash and cash equivalents at beginning of period | 1,997,199 | 1,764,746 | ||||||
Cash and cash equivalents at end of period | $ | 1,969,593 | $ | 1,857,285 | ||||
The accompanying notes are an integral part of these financial statements.
6
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in thousands, except per share amounts) | Common Stock | Additional Paid-In Capital | AOCI | Retained Earnings | Total Shareholders' Equity | NCI | Total Equity | ||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2020 | 140,533 | $ | 1,403 | $ | 170,750 | $ | (499,353 | ) | $ | 1,418,845 | $ | 1,091,645 | $ | 118,520 | $ | 1,210,165 | |||||||
Net earnings (loss) | — | — | — | — | (24,990 | ) | (24,990 | ) | 6,728 | (18,262 | ) | ||||||||||||
OCI | — | — | — | 20,717 | — | 20,717 | 2,421 | 23,138 | |||||||||||||||
Distributions to NCI | — | — | — | — | — | — | (8,080 | ) | (8,080 | ) | |||||||||||||
Capital contributions by NCI | — | — | — | — | — | — | 19,552 | 19,552 | |||||||||||||||
Other NCI transactions | — | — | 1,064 | — | — | 1,064 | 31 | 1,095 | |||||||||||||||
Stock-based plan activity | 32 | — | 3,275 | — | 11 | 3,286 | — | 3,286 | |||||||||||||||
BALANCE AS OF JUNE 30, 2020 | 140,565 | $ | 1,403 | $ | 175,089 | $ | (478,636 | ) | $ | 1,393,866 | $ | 1,091,722 | $ | 139,172 | $ | 1,230,894 | |||||||
(in thousands, except per share amounts) | Common Stock | Additional Paid-In Capital | AOCI | Retained Earnings | Total Shareholders' Equity | NCI | Total Equity | ||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2019 | 140,174 | $ | 1,399 | $ | 165,314 | $ | (379,873 | ) | $ | 1,700,912 | $ | 1,487,752 | $ | 96,340 | $ | 1,584,092 | |||||||
Net earnings (loss) | — | — | — | — | (290,949 | ) | (290,949 | ) | 16,237 | (274,712 | ) | ||||||||||||
Cumulative adjustment for the adoption of ASC 326 | — | — | — | — | (1,977 | ) | (1,977 | ) | — | (1,977 | ) | ||||||||||||
OCI | — | — | — | (98,763 | ) | — | (98,763 | ) | (1,796 | ) | (100,559 | ) | |||||||||||
Dividends ($0.10 per share) | — | — | — | — | (14,120 | ) | (14,120 | ) | — | (14,120 | ) | ||||||||||||
Distributions to NCI | — | — | — | — | — | — | (10,831 | ) | (10,831 | ) | |||||||||||||
Capital contributions by NCI | — | — | — | — | — | — | 39,520 | 39,520 | |||||||||||||||
Other NCI transactions | — | — | 1,736 | — | — | 1,736 | (298 | ) | 1,438 | ||||||||||||||
Stock-based plan activity | 391 | 4 | 8,039 | — | — | 8,043 | — | 8,043 | |||||||||||||||
BALANCE AS OF JUNE 30, 2020 | 140,565 | $ | 1,403 | $ | 175,089 | $ | (478,636 | ) | $ | 1,393,866 | $ | 1,091,722 | $ | 139,172 | $ | 1,230,894 | |||||||
The accompanying notes are an integral part of these financial statements.
7
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)
(in thousands, except per share amounts) | Common Stock | Additional Paid-In Capital | AOCI | Retained Earnings | Total Shareholders' Equity | NCI | Total Equity | ||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2019 | 140,109 | $ | 1,399 | $ | 94,456 | $ | (498,621 | ) | $ | 3,215,871 | $ | 2,813,105 | $ | 163,612 | $ | 2,976,717 | |||||||
Net earnings (loss) | — | — | — | — | (414,021 | ) | (414,021 | ) | (38,679 | ) | (452,700 | ) | |||||||||||
OCI | — | — | — | (12,445 | ) | — | (12,445 | ) | (279 | ) | (12,724 | ) | |||||||||||
Dividends ($0.21 per share) | — | — | — | — | (29,740 | ) | (29,740 | ) | — | (29,740 | ) | ||||||||||||
Distributions to NCI | — | — | — | — | — | — | (5,420 | ) | (5,420 | ) | |||||||||||||
Capital contributions by NCI | — | — | — | — | — | — | 3,054 | 3,054 | |||||||||||||||
Other NCI transactions | — | — | 2,048 | — | — | 2,048 | 964 | 3,012 | |||||||||||||||
Stock-based plan activity | 65 | — | 16,539 | — | — | 16,539 | — | 16,539 | |||||||||||||||
BALANCE AS OF JUNE 30, 2019 | 140,174 | $ | 1,399 | $ | 113,043 | $ | (511,066 | ) | $ | 2,772,110 | $ | 2,375,486 | $ | 123,252 | $ | 2,498,738 | |||||||
(in thousands, except per share amounts) | Common Stock | Additional Paid-In Capital | AOCI | Retained Earnings | Total Shareholders' Equity | NCI | Total Equity | ||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2018 | 139,654 | $ | 1,396 | $ | 82,106 | $ | (543,531 | ) | $ | 3,294,154 | $ | 2,834,125 | $ | 146,128 | $ | 2,980,253 | |||||||
Net earnings (loss) | — | — | — | — | (482,925 | ) | (482,925 | ) | (14,820 | ) | (497,745 | ) | |||||||||||
Cumulative adjustment for the adoption of ASC 842 | — | — | — | — | 20,544 | 20,544 | — | 20,544 | |||||||||||||||
OCI | — | — | — | 32,465 | — | 32,465 | 206 | 32,671 | |||||||||||||||
Dividends ($0.42 per share) | — | — | 218 | — | (59,663 | ) | (59,445 | ) | — | (59,445 | ) | ||||||||||||
Distributions to NCI | — | — | — | — | — | — | (15,572 | ) | (15,572 | ) | |||||||||||||
Capital contributions by NCI | — | — | — | — | — | — | 7,821 | 7,821 | |||||||||||||||
Other NCI transactions | — | — | 3,083 | — | — | 3,083 | (511 | ) | 2,572 | ||||||||||||||
Stock-based plan activity | 520 | 3 | 27,636 | — | — | 27,639 | — | 27,639 | |||||||||||||||
BALANCE AS OF JUNE 30, 2019 | 140,174 | $ | 1,399 | $ | 113,043 | $ | (511,066 | ) | $ | 2,772,110 | $ | 2,375,486 | $ | 123,252 | $ | 2,498,738 | |||||||
The accompanying notes are an integral part of these financial statements.
8
1. Principles of Consolidation
The financial statements do not include footnotes and certain financial information normally presented annually under GAAP, and therefore, should be read in conjunction with our 2019 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. Although such estimates are based on management’s most recent assessment of the underlying facts and circumstances utilizing the most current information available including considerations for the potential impacts of COVID-19, our reported results of operations may not necessarily be indicative of results that we expect for the full year.
The financial statements included herein are unaudited; however, they contain all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our financial position and our results of operations and cash flows as of and for the interim periods presented. All significant intercompany transactions of consolidated subsidiaries are eliminated. Certain amounts in 2019 have been reclassified to conform to the 2020 presentation, which includes the segregation of Disc Ops and assets and liabilities held for sale. Segment operating information for 2019 has been recast to reflect the current composition of our reportable segments. Management has evaluated all material events occurring subsequent to June 30, 2020 through the filing date of the Q2 2020 10-Q.
In the first quarter of 2020, we decided to retain our government business, which had been included in Disc Ops since the third quarter of 2019. As a result, the government business is no longer reported as a discontinued operation for any period presented. Our plan to sell the AMECO equipment business remains unchanged and it remains reported as a discontinued operation. We expect to complete the sale of the AMECO equipment business within the first half of 2021. The assets and liabilities of the AMECO business are classified as held for sale for all periods presented.
2. Recent Accounting Pronouncements
Accounting Pronouncements Implemented During the First Half of 2020
On January 1, 2020, we adopted ASC Topic 326, “Financial Instruments - Credit Losses,” which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The new guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. We adopted ASC 326 using the modified retrospective method, and accordingly, the new guidance was applied to financial assets measured at amortized cost (primarily accounts receivable and contract assets) that existed as of January 1, 2020 (the date of initial application). As a result, we recorded additional reserves for credit losses of $2 million and a cumulative effect adjustment to decrease retained earnings by $2 million as of January 1, 2020. The adoption of ASC 326 did not have a material impact on our results of operations or any impact on our cash flows. We utilize a combination of methods for estimating expected credit losses including loss rates, aging schedules and probability-of-default. In evaluating our historical loss rates, accounts receivable and contract assets are pooled into the following categories based on similar risk characteristics: (1) EPC management; (2) government; (3) operations and maintenance; and (4) equipment leasing. Historical loss experience is adjusted for current conditions and reasonable and supportable forecasts, when applicable. Significantly aged receivables are evaluated individually by credit rating. Our reserve for credit losses amounted to $37 million and $35 million as of June 30, 2020 and December 31, 2019, respectively.
In the first quarter of 2020, we adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The adoption did not have a material impact on our financial statements.
In the first quarter of 2020, we adopted ASU 2018-18, “Clarifying the Interaction between Topic 808 and Topic 606,” which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. The adoption did not have any impact on our financial statements.
9
In the first quarter of 2020, we adopted ASU 2018-17, “Targeted Improvements to Related Party Guidance for Variable Interest Entities,” which amends the guidance for determining whether a decision-making fee is a variable interest. The adoption did not have any impact on our financial statements.
In the first quarter of 2020, we adopted ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The adoption did not have any impact on our financial statements.
In the first quarter of 2020, we adopted ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which amends certain disclosure requirements for fair value measurements. For example, public companies will now be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The adoption did not have any impact on our financial statements, but we have made additional disclosures related to the range and weighted average rates used to develop significant inputs for nonrecurring Level 3 measurements.
Accounting Pronouncements Not Yet Implemented
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which amends certain disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 becomes effective for us on January 1, 2021, but we do not expect its adoption to have any impact on our financial statements.
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3. Earnings Per Share
Potentially dilutive securities include stock options, RSUs, restricted stock and VDI units. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities using the treasury stock method.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Amounts attributable to Fluor Corporation: | ||||||||||||||||
Net earnings (loss) from Cont Ops | $ | (26,934 | ) | $ | (397,430 | ) | $ | (198,038 | ) | $ | (465,520 | ) | ||||
Net earnings (loss) from Disc Ops | 1,944 | (16,591 | ) | (92,911 | ) | (17,405 | ) | |||||||||
Net earnings (loss) | $ | (24,990 | ) | $ | (414,021 | ) | $ | (290,949 | ) | $ | (482,925 | ) | ||||
Basic EPS attributable to Fluor Corporation: | ||||||||||||||||
Weighted average common shares outstanding | 140,536 | 140,141 | 140,399 | 139,959 | ||||||||||||
Net earnings (loss) from Cont Ops | $ | (0.19 | ) | $ | (2.84 | ) | $ | (1.41 | ) | $ | (3.33 | ) | ||||
Net earnings (loss) from Disc Ops | 0.01 | (0.11 | ) | (0.66 | ) | (0.12 | ) | |||||||||
Net earnings (loss) | $ | (0.18 | ) | $ | (2.95 | ) | $ | (2.07 | ) | $ | (3.45 | ) | ||||
Diluted EPS attributable to Fluor Corporation: | ||||||||||||||||
Weighted average common shares outstanding | 140,536 | 140,141 | 140,399 | 139,959 | ||||||||||||
Diluted effect: | ||||||||||||||||
Stock options, RSUs, restricted stock and VDI units(1) | — | — | — | — | ||||||||||||
Weighted average diluted shares outstanding | 140,536 | 140,141 | 140,399 | 139,959 | ||||||||||||
Net earnings (loss) from Cont Ops | $ | (0.19 | ) | $ | (2.84 | ) | $ | (1.41 | ) | $ | (3.33 | ) | ||||
Net earnings (loss) from Disc Ops | 0.01 | (0.11 | ) | (0.66 | ) | (0.12 | ) | |||||||||
Net earnings (loss) | $ | (0.18 | ) | $ | (2.95 | ) | $ | (2.07 | ) | $ | (3.45 | ) | ||||
(1) Anti-dilutive securities not included in shares outstanding | 384 | 526 | 411 | 633 | ||||||||||||
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4. Operating Information by Segment and Geographic Area
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Revenue | ||||||||||||||||
Energy & Chemicals | $ | 1,495.9 | $ | 1,398.9 | $ | 2,851.4 | $ | 2,873.6 | ||||||||
Mining & Industrial | 1,013.0 | 1,278.3 | 2,186.9 | 2,329.6 | ||||||||||||
Infrastructure & Power | 474.7 | 229.4 | 860.5 | 573.4 | ||||||||||||
Government | 701.8 | 721.9 | 1,419.4 | 1,478.0 | ||||||||||||
Diversified Services | 382.9 | 514.9 | 840.1 | 1,003.3 | ||||||||||||
Other | 22.7 | 3.0 | 51.2 | 22.1 | ||||||||||||
Total revenue | $ | 4,091.0 | $ | 4,146.4 | $ | 8,209.5 | $ | 8,280.0 | ||||||||
Segment profit (loss) | ||||||||||||||||
Energy & Chemicals | $ | 41.0 | $ | (222.0 | ) | $ | 34.6 | $ | (209.8 | ) | ||||||
Mining & Industrial | 29.8 | 44.7 | 68.4 | 72.2 | ||||||||||||
Infrastructure & Power | 3.5 | (167.2 | ) | 8.7 | (189.0 | ) | ||||||||||
Government | 10.5 | 26.4 | 41.4 | 64.8 | ||||||||||||
Diversified Services | (4.8 | ) | 3.0 | 0.3 | 11.7 | |||||||||||
Other | (19.3 | ) | (77.4 | ) | (40.8 | ) | (103.5 | ) | ||||||||
Total segment profit (loss) | $ | 60.7 | $ | (392.5 | ) | $ | 112.6 | $ | (353.6 | ) | ||||||
Corporate G&A | (39.7 | ) | (49.9 | ) | (25.7 | ) | (108.6 | ) | ||||||||
Impairment, restructuring and other exit costs | (5.1 | ) | (26.7 | ) | (302.6 | ) | (54.0 | ) | ||||||||
Interest income (expense), net | (11.7 | ) | (4.1 | ) | (18.0 | ) | (9.8 | ) | ||||||||
Earnings (loss) attributable to NCI from Cont Ops | 6.7 | (38.7 | ) | 16.2 | (14.8 | ) | ||||||||||
Earnings (loss) from Cont Ops before taxes | $ | 10.9 | $ | (511.9 | ) | $ | (217.5 | ) | $ | (540.8 | ) | |||||
Energy & Chemicals. Segment profit for the 2019 Quarter and 2019 Period included charges totaling $179 million (or $1.07 per share) and $240 million (or $1.40 per share), respectively, for cost growth on an offshore project. Additional charges totaling $87 million (or $0.50 per share) for both the 2019 Quarter and 2019 Period resulted from schedule-driven cost growth and client and subcontractor negotiations on two downstream projects and scope reductions on a large upstream project. Pre-contract costs of $26 million (or $0.15 per share) were expensed in both the 2019 Quarter and 2019 Period due to our evaluation of the probability of receiving an award. Segment profit during the 2019 Period was also impacted by a charge of $31 million (or $0.22 per share) resulting from the resolution of certain close-out matters with a customer. There were no similar material charges in 2020.
Infrastructure & Power. Segment profit for the 2019 Quarter and 2019 Period included charges totaling $109 million (or $0.60 per share) and $135 million (or $0.74 per share), respectively, which included the settlement of client disputes, as well as cost growth related to certain close-out matters, on three lump-sum, gas-fired power plant projects that were substantially complete as of December 31, 2019. Segment profit during both the 2019 Quarter and 2019 Period also included charges totaling $55 million (or $0.30 per share) resulting from late engineering changes and schedule-driven cost growth, as well as negotiations with clients and subcontractors on pending change orders, for several infrastructure projects. There were no similar material charges in 2020.
Diversified Services. Intercompany revenue for Diversified Services, excluded from the amounts shown above, was $62 million and $140 million for the 2020 Quarter and 2020 Period, respectively, and $92 million and $172 million for the 2019 Quarter and 2019 Period, respectively.
Other. Segment loss for the 2019 Quarter included charges totaling $57 million (or $0.32 per share) resulting from estimated cost growth related to the Radford project. There were no similar material charges in 2020. Segment loss for all periods included
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the operations of NuScale, which are primarily for research and development activities associated with the licensing and commercialization of small modular nuclear reactor technology. NuScale expenses included in the determination of segment loss were $18 million and $41 million for the 2020 Quarter and 2020 Period, respectively, and $18 million and $34 million for the 2019 Quarter and 2019 Period, respectively. NuScale expenses were reported net of qualified reimbursable expenses of $20 million and $33 million for the 2020 Quarter and 2020 Period, respectively, and $15 million and $28 million for the 2019 Quarter and 2019 Period, respectively.
Corporate G&A. Foreign currency gains and (losses) of $45 million and ($18 million) were included in corporate G&A during the 2020 Period and 2019 Period, respectively.
Total assets by segment are as follows:
(in millions) | June 30, 2020 | December 31, 2019 | ||||||
Energy & Chemicals | $ | 961.5 | $ | 1,139.3 | ||||
Mining & Industrial | 549.6 | 594.9 | ||||||
Infrastructure & Power | 540.6 | 471.2 | ||||||
Government | 594.6 | 629.1 | ||||||
Diversified Services | 951.8 | 1,290.6 | ||||||
Other | 37.2 | 68.5 | ||||||
Corporate | 3,345.8 | 3,379.3 | ||||||
Energy & Chemicals. During the 2020 Period, we recognized impairment expense of $86 million for equity method investments in "Impairment, restructuring and other exit costs". We also recorded a reserve of $55 million on receivables and contract assets during the 2020 Period for expected credit losses associated with certain joint venture clients that were affected by the impacts of COVID-19 and declining oil prices.
Diversified Services. During the 2020 Period, we recognized impairment expense of $169 million on goodwill and $27 million on intangible customer relationships in the Diversified Services segment. Additionally, accounts receivable and contract assets at June 30, 2020 decreased by $101 million compared to December 31, 2019.
Revenue by project location follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
North America | $ | 2,545.7 | $ | 1,931.1 | $ | 4,990.8 | $ | 3,836.8 | ||||||||
Asia Pacific (includes Australia) | 360.0 | 478.8 | 686.6 | 898.7 | ||||||||||||
Europe | 792.9 | 957.5 | 1,464.5 | 1,968.1 | ||||||||||||
Central and South America | 258.7 | 574.2 | 766.0 | 1,028.2 | ||||||||||||
Middle East and Africa | 133.7 | 204.8 | 301.6 | 548.2 | ||||||||||||
Total revenue | $ | 4,091.0 | $ | 4,146.4 | $ | 8,209.5 | $ | 8,280.0 | ||||||||
5. Impairment, Restructuring and Other Exit Costs
Restructuring and Other Exit Costs
During 2019, we initiated a broad restructuring plan designed to optimize costs and improve operational efficiency. These efforts primarily relate to the rationalization of resources, investments, real estate and overhead across various geographies, as well as the liquidation of certain components of the AMECO business that are being excluded from sale. We expect that our restructuring activities will be substantially completed in 2020. Restructuring costs of $5 million, primarily related to severance, were recognized during both the 2020 Quarter and 2020 Period. Restructuring costs of $27 million and $54 million, respectively, primarily related to severance and asset impairment expense, were recognized during the 2019 Quarter and 2019 Period. Restructuring plan costs are summarized as follows:
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(in millions) | Recognized to Date | Total Cost Expected to be Incurred | ||||||
Restructuring and other exit costs: | ||||||||
Severance | $ | 68.9 | $ | 70.0 | ||||
Asset impairments | 90.4 | 90.4 | ||||||
Entity liquidation costs (including the recognition of cumulative translation adjustments) | 83.7 | 85.0 | ||||||
Other exit costs | 2.1 | 5.0 | ||||||
Total restructuring and other exit costs | $ | 245.1 | $ | 250.4 | ||||
A reconciliation of the restructuring liabilities follows:
(in thousands) | Severance | Lease Exit Costs | Other | Total | ||||||||
Balance as of December 31, 2019 | $ | 46,303 | $ | 570 | $ | 307 | $ | 47,180 | ||||
Restructuring charges accrued during the period | 4,421 | 88 | 549 | 5,058 | ||||||||
Cash payments / settlements during the period | (14,222 | ) | (640 | ) | (228 | ) | (15,090 | ) | ||||
Currency translation | 12 | — | — | 12 | ||||||||
Balance as of June 30, 2020 | $ | 36,514 | $ | 18 | $ | 628 | $ | 37,160 | ||||
Impairment
Certain of our businesses have been adversely affected by the economic impacts of the outbreak of COVID-19 and the steep decline in commodity prices that occurred in the first quarter of 2020. These events have caused significant uncertainty and economic volatility and disruption, which have impacted and may continue to impact our business operations. We have experienced, and may continue to experience, reductions in demand for certain of our services and the delay or abandonment of ongoing or anticipated projects due to our clients’, suppliers’ and other third parties’ diminished financial condition or financial distress, as well as governmental budget constraints. These impacts are expected to continue or worsen if stay-at-home, social distancing, travel restrictions and other similar orders or restrictions remain in place for an extended period of time or are re-imposed after being relaxed. Significant uncertainty still exists concerning the magnitude of the impact and duration of these events. Because of these events and their impact on our operations through the date of this filing, we performed interim impairment testing of our goodwill, intangible assets and investments and recognized the following impairment expenses during the first quarter of 2020, which were included in “Impairment, restructuring and other exit costs”:
• Impairment of goodwill associated with the Diversified Services reporting unit of approximately $169 million;
• Impairment of intangible customer relationships associated with the Stork business of $27 million;
• | Impairment of equity method investments in the Energy & Chemicals business of $86 million; and |
• | Impairment of information technology assets totaling $16 million. |
No additional impairment expense was recognized during the 2020 Quarter.
As part of our assessment of goodwill, the fair value of the reporting units was determined using an income based approach that utilized unobservable Level 3 inputs, including significant management assumptions such as expected awards, forecasted revenue and operating margins, weighted average cost of capital, working capital assumptions and general market trends and conditions.
The customer relationships' valuation approach utilized unobservable Level 3 inputs including ranges of assumptions of long-term revenue growth from 2% to 5.5% with a weighted average of 2.4%, weighted average cost of capital of 12% and a customer attrition factor of 10%.
The valuation of the equity method investments utilized unobservable Level 3 inputs based on the forecast of anticipated volumes and overhead absorption in a cyclical business.
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6. Income Taxes
The effective tax rate on earnings (loss) from Cont Ops was 285.7% for the 2020 Quarter and 16.4% for the 2020 Period compared to 14.8% and 11.2% for the corresponding periods of 2019. The effective tax rate for all periods was unfavorably impacted by foreign income tax rates that exceed the U.S. statutory rate of 21%, as well as the establishment or augmentation of valuation allowances against foreign tax credits and certain losses. The effective tax rate for the 2020 Period was favorably impacted by the release of valuation allowances and rate benefits resulting from the carryback of our 2019 federal net operating loss as allowed by the CARES Act, enacted on March 27, 2020. Earnings attributable to noncontrolling interests from Cont Ops, for which income taxes are not typically our responsibility, unfavorably impacted the effective tax rate for the 2019 Quarter and 2019 Period.
7. Cash Paid for Interest and Taxes
Cash paid for interest was $38 million and $42 million during the 2020 Period and 2019 Period, respectively. Income tax payments, net of refunds, were $32 million and $129 million during the 2020 Period and 2019 Period, respectively.
8. Partnerships and Joint Ventures
In the normal course of business, we form partnerships or joint ventures primarily for the execution of single contracts or projects. The majority of these partnerships or joint ventures are characterized by a 50 percent or less noncontrolling ownership or participation interest with decision making and distribution of expected gains and losses typically being proportionate to the ownership or participation interest. Many of the partnership and joint venture agreements provide for capital calls to fund operations, as necessary. Accounts receivable related to work performed for unconsolidated partnerships and joint ventures included in “Accounts and notes receivable, net” was $175 million and $149 million as of June 30, 2020 and December 31, 2019, respectively.
During the first quarter of 2020, we evaluated our significant investments and determined that certain of our investments were other-than-temporarily impaired as of March 31, 2020. As a result, impairment expenses of $86 million were recognized.
One of our more significant joint ventures is COOEC Fluor, in which we have a 49% ownership interest. COOEC Fluor owns, operates and manages the Zhuhai Fabrication Yard in China’s Guangdong province. We have a scheduled funding commitment to the joint venture of $26 million due at the end of 2020.
During the 2020 Quarter, we sold our 50% ownership interest in Sacyr Fluor and recognized a loss of $11 million, which was included in Energy & Chemicals' segment profit.
Variable Interest Entities
We assess our partnerships and joint ventures at inception to determine if any meet the qualifications of a VIE. We consider a partnership or joint venture a VIE if it has any of the following characteristics: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events, we reassess our initial determination of whether the partnership or joint venture is a VIE. The majority of our partnerships and joint ventures qualify as VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional subordinated financial support.
We also perform a qualitative assessment of each VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. We consider the contractual agreements that define the ownership structure, distribution
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of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if we are the primary beneficiary. We also consider all parties that have direct or implicit variable interests when determining whether we are the primary beneficiary. Management's assessment of whether we are the primary beneficiary of a VIE is continuously performed.
The net carrying value of unconsolidated VIEs (classified under both "Investments” and “Other accrued liabilities”) was a net asset of $231 million and $217 million as of June 30, 2020 and December 31, 2019, respectively. Some of our VIEs have debt; however, such debt is typically non-recourse to us. Our maximum exposure to loss as a result of our investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding necessary to satisfy the contractual obligations of the VIE. Future funding commitments as of June 30, 2020 for the unconsolidated VIEs were $77 million.
In some cases, we are required to consolidate certain VIEs. As of June 30, 2020, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.2 billion and $791 million, respectively. As of December 31, 2019, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.1 billion and $798 million, respectively. The assets of a VIE are restricted for use only for the particular VIE and are not available for our general operations.
We have agreements with certain VIEs to provide financial or performance assurances to clients, as discussed elsewhere.
9. Guarantees
In the ordinary course of business, we enter into various agreements providing performance assurances and guarantees to our clients on behalf of certain unconsolidated and consolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support project execution commitments. The performance guarantees have various expiration dates ranging from mechanical completion of the project to a period extending beyond contract completion. The maximum potential amount of future payments that we could be required to make under outstanding performance guarantees, which represents the remaining cost of work to be performed, was estimated to be $16 billion as of June 30, 2020. Amounts that may be required to be paid in excess of estimated cost to complete contracts in progress are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed. For lump-sum contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors for claims. The performance guarantee obligation was not material as of June 30, 2020 and December 31, 2019.
10. Contingencies and Commitments
We and certain of our subsidiaries are subject to litigation, claims and other commitments and contingencies arising in the ordinary course of business. Although the asserted value of these matters may be significant, we currently do not expect that the ultimate resolution of any open matters will have a material adverse effect on our financial position or results of operations.
Since May 2018, purported shareholders have filed various complaints against Fluor Corporation and certain of its current and former executives in the U.S. District Court for the Northern District of Texas. The plaintiffs purport to represent a class of shareholders who purchased or otherwise acquired Fluor common stock from August 14, 2013 through February 14, 2020, and seek to recover damages arising from alleged violations of federal securities laws. These claims are based on statements concerning Fluor’s internal and disclosure controls, risk management, revenue recognition, and Fluor’s gas-fired power business, which plaintiffs assert were materially misleading. As of May 26, 2020, these complaints have been consolidated into one matter. We filed a motion to dismiss the matter on July 1, 2020. A hearing on the motion to dismiss is anticipated to occur in late 2020 or early 2021. While no assurance can be given as to the ultimate outcome of this matter, we do not believe it is probable that a loss will be incurred.
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Since September 2018, nine separate purported shareholders' derivative actions were filed against current and former members of the Board of Directors, as well as certain of Fluor’s current and former executives. Fluor Corporation is named as a nominal defendant in the actions. These derivative actions purport to assert claims on behalf of Fluor Corporation and make substantially the same factual allegations as the securities class action matter discussed above and seek various forms of monetary and injunctive relief. These actions are pending in Texas state court (District Court for Dallas County), the U.S. District Court for the District of Delaware, the U.S. District Court for the Northern District of Texas, and the Court of Chancery of the State of Delaware. Certain of these actions have been consolidated and stayed until our motion to dismiss is ruled upon in the securities class action matter. While no assurance can be given as to the ultimate outcome of this matter, we do not believe it is probable that a loss will be incurred.
Fluor Australia Ltd., our wholly-owned subsidiary (“Fluor Australia”), completed a cost reimbursable engineering, procurement and construction management services project for Santos Ltd. (“Santos”) involving a large network of natural gas gathering and processing facilities in Queensland, Australia. On December 13, 2016, Santos filed an action in Queensland Supreme Court against Fluor Australia, asserting various causes of action and seeking damages and/or a refund of contract proceeds paid of approximately AUD $1.47 billion. Santos has joined Fluor Corporation to the matter on the basis of a parent company guarantee issued for the project. We believe that the claims asserted by Santos are without merit and we are vigorously defending these claims. While no assurance can be given as to the ultimate outcome of this matter, we do not believe it is probable that a loss will be incurred. Accordingly, we have not recorded a charge as a result of this action.
Fluor Limited, our wholly-owned subsidiary (“Fluor Limited”), and Fluor Arabia Limited, a partially-owned subsidiary
(“Fluor Arabia”), completed cost reimbursable engineering, procurement and construction management services for Sadara Chemical Company (“Sadara”) involving a large petrochemical facility in Jubail, Kingdom of Saudi Arabia. On August 23, 2019, Fluor Limited and Fluor Arabia Limited commenced arbitration proceedings against Sadara after it refused to pay invoices totaling approximately $100 million due under the parties’ agreements. As part of the arbitration proceedings, Sadara has asserted various counterclaims for damages and/or a refund of contract proceeds paid totaling approximately $574 million against Fluor Limited and Fluor Arabia Limited. We believe that the counterclaims asserted by Sadara are without merit and are vigorously defending these claims. While no assurance can be given as to the ultimate outcome of the counterclaims, we do not believe it is probable that a loss will be incurred. Accordingly, we have not recorded a charge as a result of the counterclaims.
Various wholly-owned subsidiaries of Fluor, in conjunction with a partner, TECHINT, (“Fluor/TECHINT”) performed engineering, procurement and construction management services on a cost reimbursable basis for Barrick involving a gold mine and ore processing facility on a site straddling the border between Argentina and Chile. In 2013 Barrick terminated the Fluor/TECHINT agreements for convenience and not due to the performance of Fluor/TECHINT. On August 12, 2016, Barrick filed a notice of arbitration against Fluor/TECHINT, demanding damages and/or a refund of contract proceeds paid of not less than $250 million under various claims relating to Fluor/TECHINT’s alleged performance. Proceedings were suspended while the parties explored a possible settlement. In August 2019, Barrick drew down $36 million of letters of credit from Fluor/TECHINT ($24 million from Fluor and $12 million from TECHINT). Thereafter, Barrick proceeded to reactivate the arbitration. We believe that the claims asserted by Barrick are without merit and are vigorously defending these claims. While no assurance can be given as to the ultimate outcome of this matter, we do not believe it is probable that a loss will be incurred. Accordingly, we have not recorded a charge as a result of these claims.
Purple Line Transit Partners, LLC (“PLTP”) entered into a Public Private Partnership Agreement (“PPPA”) with the Maryland Department of Transportation and the Maryland Transit Administration (together, the “State”) for the finance, design, construction, and operation of the Purple Line Project, a new light rail line in Maryland (the “Project”). PLTP is a limited liability company in which Fluor has a fifteen percent membership interest. PLTP entered into an Amended and Restated Design-Build Contract (the “DB Contract”) with Purple Line Transit Constructors, LLC (“PLTC”) as design-build contractor to perform PLTP’s design and construction obligations under the PPPA on a back-to-back basis. PLTC is a limited liability company in which Fluor has a fifty percent membership interest. The design and construction of the Project was significantly delayed by more than two and a half years due to events outside of PLTP or PLTC’s control. The PPPA contained a provision allowing PLTP the unconditional right to terminate the PPPA if certain events delayed the design and construction of the Project by 365 days or more. The DB Contract contained a similar provision allowing PLTC to terminate the DB Contract. Because of significant Project delays, in excess of 365 days, on May 1, 2020, PLTC gave notice to PLTP of PLTC’s intent to terminate the DB Contract. Upon receiving PLTC’s notice, on June 23, 2020, PLTP exercised its unconditional right to terminate
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the PPPA. The State has challenged PLTP’s termination of the PPPA and commenced a lawsuit in Maryland state court against PLTP alleging breach of the PPPA. We believe that PLTP and PLTC’s terminations of the PPPA and DB Contract, respectively, were justified and are vigorously defending against the State’s lawsuit.
Other Matters
We have made claims arising from the performance under our contracts. We periodically evaluate our positions and the amounts recognized with respect to all of our claims and back charges. As of June 30, 2020 and December 31, 2019, we had recorded $212 million and $198 million, respectively, of claim revenue for costs incurred to date. Additional costs, which will increase the claim revenue balance over time, are expected to be incurred in future periods. We also had recorded disputed back charges to suppliers or subcontractors totaling $2 million as of both June 30, 2020 and December 31, 2019. We believe the ultimate recovery of amounts related to these claims and back charges is probable in accordance with ASC 606.
From time to time, we enter into significant contracts with the U.S. government and its agencies. Government contracts are subject to audits and investigations by government representatives with respect to our compliance with various restrictions and regulations applicable to government contractors, including but not limited to the allowability of costs incurred under reimbursable contracts. In connection with performing government contracts, we maintain reserves for estimated exposures associated with these matters.
Our operations are subject to and affected by federal, state and local laws and regulations regarding the protection of the environment. We maintain reserves for potential future environmental cost where such obligations are either known or considered probable, and can be reasonably estimated. We believe, based upon present information available to us, that our reserves with respect to future environmental cost are adequate and such future cost will not have a material effect on our consolidated financial position, results of operations or liquidity.
On February 18, 2020, we announced that the SEC is conducting an investigation and has requested documents and information related to projects for which we recorded charges in the second quarter of 2019. On April 30, 2020, the Corporation received a subpoena from the U.S. Department of Justice (“DOJ”) seeking documents and information related to the second quarter 2019 charges; certain of the projects associated with those charges; and certain project accounting, financial reporting and governance matters. We are coordinating responses to the SEC and DOJ and cooperating in providing the requested documents and information, which efforts are ongoing.
11. Contract Assets and Liabilities
The following summarizes information about our contract assets and liabilities:
(in millions) | June 30, 2020 | December 31, 2019 | ||||
Information about contract assets: | ||||||
Contract assets | ||||||
Unbilled receivables | $ | 692 | $ | 851 | ||
Contract work in progress | 378 | 387 | ||||
Contract assets | $ | 1,070 | $ | 1,238 | ||
Advance billings deducted from contract assets | $ | 474 | $ | 574 | ||
Six Months Ended June 30, | ||||||
(in millions) | 2020 | 2019 | ||||
Revenue recognized that was included in contract liabilities as of January 1 | $ | 647 | $ | 704 | ||
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12. Remaining Unsatisfied Performance Obligations
We estimate that our RUPO will be satisfied over the following periods:
(in millions) | June 30, 2020 | ||
Within 1 year | $ | 13,546 | |
1 to 2 years | 6,774 | ||
Thereafter | 6,860 | ||
Total remaining unsatisfied performance obligations | $ | 27,180 | |
13. Debt and Letters of Credit
As of June 30, 2020, letters of credit totaling $463 million were outstanding under our committed lines of credit, which
consist of a $1.7 billion Revolving Loan and Letter of Credit Facility and a $1.8 billion Revolving Loan and Letter of Credit Facility. Both facilities mature in February 2022. These credit facilities contain customary financial and restrictive covenants, including a debt-to-capitalization ratio that cannot exceed 0.6 to 1.0 and a limitation on the aggregate amount of debt of the greater of $750 million or €750 million for our subsidiaries. As of June 30, 2020, our financial covenants limit our borrowings to approximately $632 million under the committed credit facilities, although no amounts were drawn. Borrowings under both facilities, which may be denominated in USD, EUR, GBP or CAD, bear interest at rates based on the Eurodollar Rate or an alternative base rate, plus an applicable borrowing margin.
Due to the delays in the preparation of our financial statements for the quarter ended June 30, 2020, we were not in compliance with the reporting deadlines under these facilities. We have entered into amendments to extend the deadlines to provide financial information for the second and third quarters until November 30 and December 31, 2020, respectively.
As of June 30, 2020, letters of credit totaling $880 million were also outstanding under uncommitted lines of credit.
In August 2020, we received a notice of default from the trustee under the indenture governing all of our Senior Notes arising from the delay in the filing of the 2019 10-K and the Q1 2020 10-Q. Upon the filing of the 2019 10-K on September 25, 2020 and the Q1 2020 10-Q on October 22, 2020, we have satisfied these reporting requirements under the indenture. In September 2020, we received a second notice of default from the trustee arising from the delay in the filing of this Q2 2020 10-Q. Under the indenture, we have until December 22, 2020 to provide the required information which is accomplished via the filing of this Q2 2020 10-Q.
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14. Fair Value Measurements
The following table delineates assets and liabilities that are measured at fair value on a recurring basis:
June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
Fair Value Hierarchy | Fair Value Hierarchy | |||||||||||||||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Deferred compensation trusts(1) | $ | 7,617 | $ | 7,617 | $ | — | $ | — | $ | 7,719 | $ | 7,719 | $ | — | $ | — | ||||||||||||||||
Derivative assets(2) | ||||||||||||||||||||||||||||||||
Foreign currency | 6,553 | — | 6,553 | — | 7,167 | — | 7,167 | — | ||||||||||||||||||||||||
Commodity | 66 | — | 66 | — | 46 | — | 46 | — | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Derivative liabilities(2) | ||||||||||||||||||||||||||||||||
Foreign currency | $ | 11,204 | $ | — | $ | 11,204 | $ | — | $ | 6,561 | $ | — | $ | 6,561 | $ | — | ||||||||||||||||
Commodity | 6,665 | — | 6,665 | — | 1,247 | — | 1,247 | — | ||||||||||||||||||||||||
_________________________________________________________
(1) | Consists of registered money market funds and an equity index fund. These investments, which are trading securities, represent the net asset value of the close of business at the end of the period based on the last trade or official close of an active market or exchange. |
(2) | Foreign currency and commodity derivatives are estimated using pricing models with market-based inputs, which take into account the present value of estimated future cash flows. |
We have measured assets and liabilities held for sale and certain other impaired assets at fair value on a nonrecurring basis.
The following summarizes information about financial instruments that are not required to be measured at fair value :
June 30, 2020 | December 31, 2019 | ||||||||||||||||
(in thousands) | Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Assets: | |||||||||||||||||
Cash(1) | Level 1 | $ | 1,144,328 | $ | 1,144,328 | $ | 1,014,138 | $ | 1,014,138 | ||||||||
Cash equivalents(2) | Level 2 | 825,265 | 825,265 | 983,061 | 983,061 | ||||||||||||
Marketable securities(3) | Level 2 | 12,711 | 12,711 | 7,262 | 7,262 | ||||||||||||
Notes receivable, including noncurrent portion(4) | Level 3 | 17,420 | 17,420 | 28,117 | 28,117 | ||||||||||||
Liabilities: | |||||||||||||||||
2016 Senior Notes(5) | Level 2 | $ | 559,790 | $ | 425,915 | $ | 557,185 | $ | 562,399 | ||||||||
2014 Senior Notes(5) | Level 2 | 495,720 | 424,685 | 495,240 | 510,145 | ||||||||||||
2018 Senior Notes(5) | Level 2 | 594,818 | 516,420 | 594,502 | 609,918 | ||||||||||||
Other borrowings, including noncurrent portion(6) | Level 2 | 57,605 | 57,605 | 43,540 | 43,540 | ||||||||||||
_________________________________________________________
(1) | Cash consists of bank deposits. Carrying amounts approximate fair value. |
(2) | Cash equivalents consist of held-to-maturity time deposits with maturities of three months or less at the date of purchase. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments. |
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(3) | Marketable securities consist of held-to-maturity time deposits with original maturities greater than three months that will mature within one year. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments. Amortized cost is not materially different from the fair value. |
(4) | Notes receivable are carried at net realizable value which approximates fair value. Factors considered in determining the fair value include the credit worthiness of the borrower, current interest rates, the term of the note and any collateral pledged as security. Notes receivable are periodically assessed for impairment. |
(5) | The fair value of the Senior Notes was estimated based on the quoted market prices for these issues as of the end of the period. |
(6) | Other borrowings primarily represent bank loans and other financing arrangements which mature within one year. The carrying amount of borrowings under these arrangements approximates fair value because of the short-term maturity. |
15. Stock-Based Plans
Our executive and director stock-based compensation plans are described more fully in the 2019 10-K. In the 2019 Period, RSUs totaling 1,065,139 were granted to executives and directors at a weighted-average grant date fair value of $36.45 per share. RSUs granted to executives in 2019 generally vest over three years. RSUs granted to directors in 2019 vested immediately and are subject to a post-vest holding period of three years. The fair value of RSUs represents the closing price of our common stock on the date of grant discounted for the post-vest holding period, when applicable. There were no RSUs awarded to executives or directors during the 2020 Period. Instead, RSUs were awarded to executives and directors in September 2020 following the filing of our 2019 10-K.
During the 2019 Period, stock options for the purchase of 392,841 shares at a weighted-average exercise price of $29.03 per share were awarded to executives. The exercise price of options represents the closing price of our common stock on the date of grant. The options granted in 2019 generally vest over three years and expire ten years after the grant date. There were no options awarded to executives during the 2020 Period. Instead, options were awarded to executives in September 2020 following the filing of our 2019 10-K.
In the 2019 Period, performance-based VDI units totaling 350,532 were awarded to executives. These awards vest after a period of approximately three years and contain annual performance conditions for each of the three years of the vesting period. The performance targets for each year are generally established in the first quarter. Under GAAP, performance-based awards are not deemed granted until the performance targets have been established. During the 2019 Period, units totaling 116,844, 68,866 and 72,601 under the 2019, 2018 and 2017 VDI plans, respectively, were granted at weighted-average grant date fair values of $39.72 per share, $42.24 per share and $35.18 per share, respectively. For awards granted under the 2019, 2018 and 2017 VDI plans, the number of units are adjusted at the end of each performance period based on achievement of certain performance targets and market conditions, as defined in the VDI award agreements. The grant date fair value is determined by adjusting the closing price of our common stock on the date of grant for the effect of the market condition and for the post-vest holding period discount, when applicable. Units granted under the 2019, 2018 and 2017 VDI plans can only be settled in stock and are accounted for as equity awards under GAAP. There were no VDI units awarded to executives during the 2020 Period. VDI units were awarded to executives in September 2020 following the filing of our 2019 10-K.
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16. Retirement Plans
Net periodic pension expense for our defined benefit pension plans includes the following components:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
(in thousands) | Location of Component | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | Cost of revenue | $ | 4,375 | $ | 3,948 | $ | 8,759 | $ | 7,929 | ||||||||
Interest cost | Corp G&A | 2,388 | 4,924 | 4,782 | 9,899 | ||||||||||||
Expected return on assets | Corp G&A | (6,340 | ) | (8,193 | ) | (12,696 | ) | (16,472 | ) | ||||||||
Amortization of prior service credit | Corp G&A | (218 | ) | (222 | ) | (436 | ) | (447 | ) | ||||||||
Recognized net actuarial loss | Corp G&A | 1,399 | 2,588 | 2,801 | 5,207 | ||||||||||||
Net periodic pension expense | $ | 1,604 | $ | 3,045 | $ | 3,210 | $ | 6,116 | |||||||||
We currently expect to contribute up to $15 million into our defined benefit pension plans during 2020, which is expected to be in excess of the minimum funding required. During the 2020 Period, we made contributions of approximately $10 million.
17. Derivatives and Hedging
We attempt to limit foreign currency exposure in most of our contracts by denominating contract revenue in the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility, may subject the company to earnings volatility. We may implement a hedging strategy utilizing derivatives instruments or hedging instruments to mitigate such risk. Our hedging instruments are designated as either fair value or cash flow hedges. We formally document our hedge relationships at inception, including identification of the hedging instruments and the hedged items, our risk management objectives and strategies for undertaking the hedge transaction, and the initial quantitative assessment of the hedging instrument's effectiveness in offsetting changes in the fair value of the hedged items. We subsequently assess hedge effectiveness qualitatively, unless the hedge relationship is no longer highly effective. All hedging instruments are recorded at fair value. For fair value hedges, the change in fair value is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the change in fair value is recorded as a component of AOCI and is reclassified into earnings when the hedged item settles. For derivatives that are not designated or do not qualify as hedging instruments, the change in the fair value of the derivative is offset against the change in the fair value of the underlying asset or liability through earnings. In certain limited circumstances, foreign currency payment provisions could be deemed embedded derivatives. If an embedded foreign currency derivative is identified, the derivative is bifurcated from the host contract and the change in fair value is recognized through earnings. We maintain master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, we report the fair value of derivatives on a gross basis.
Derivatives Designated as Hedges
As of June 30, 2020, we had total gross notional amounts of $715 million of foreign currency contracts outstanding (primarily related to the Canadian Dollar, Chinese Yuan, British Pound, Euro, Indian Rupee and Philippine Peso) that were designated as hedging instruments. The foreign currency contracts are of varying duration, none of which extend beyond March 2022. There were no commodity contracts outstanding that were designated as hedging instruments as of June 30, 2020.
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The fair values of derivatives designated as hedging instruments follows:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
(in thousands) | Balance Sheet Location | June 30, 2020 | December 31, 2019 | Balance Sheet Location | June 30, 2020 | December 31, 2019 | ||||||||||||||
Foreign currency contracts | Other current assets | $ | 4,438 | $ | 2,871 | Other accrued liabilities | $ | 6,162 | $ | 1,585 | ||||||||||
Commodity contracts | Other current assets | — | 10 | Other accrued liabilities | — | — | ||||||||||||||
Foreign currency contracts | Other assets | 1,657 | 3,757 | Noncurrent liabilities | 5,042 | 4,747 | ||||||||||||||
Total | $ | 6,095 | $ | 6,638 | $ | 11,204 | $ | 6,332 | ||||||||||||
The after-tax amount of gain (loss) recognized in OCI associated with derivative instruments designated as cash flow hedges follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Cash Flow Hedges (in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||
Foreign currency contracts | 1,143 | 1,629 | (3,997 | ) | 4,325 | ||||||
Commodity contracts | 3 | — | (108 | ) | — | ||||||
1,146 | 1,629 | (4,105 | ) | 4,325 | |||||||
The after-tax amount of gain (loss) reclassified from AOCI into earnings associated with derivative instruments designated as cash flow hedges follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
Cash Flow Hedges (in thousands) | Location of Gain (Loss) | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Foreign currency contracts | Cost of revenue | $ | (88 | ) | $ | (347 | ) | $ | 538 | $ | (846 | ) | ||||||
Commodity contracts | Cost of revenue | (112 | ) | — | (100 | ) | — | |||||||||||
Interest rate contracts | Interest expense | (419 | ) | (262 | ) | (838 | ) | (524 | ) | |||||||||
Total | $ | (619 | ) | $ | (609 | ) | $ | (400 | ) | $ | (1,370 | ) | ||||||
Derivatives Not Designated as Hedges
As of June 30, 2020, we also had outstanding total gross notional amounts of $88 million of foreign currency contracts and $23 million of commodity contracts that were not designated as hedging instruments. The foreign currency contracts primarily related to contract obligations denominated in nonfunctional currencies. As of June 30, 2020, we had total gross notional amounts of $9 million associated with contractual foreign currency payment provisions that were deemed embedded derivatives. The gains and losses associated with derivatives not designated as hedges and embedded derivatives were not material during the three and six months ended June 30, 2020 and 2019.
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18. Other Comprehensive Income (Loss)
The components of OCI follow:
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | |||||||||||||||||||||||
(in thousands) | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | ||||||||||||||||||
OCI: | ||||||||||||||||||||||||
Foreign currency translation adjustments | $ | 31,072 | $ | — | $ | 31,072 | $ | (16,660 | ) | $ | 2,124 | $ | (14,536 | ) | ||||||||||
Ownership share of equity method investees’ OCI | (14,901 | ) | 4,247 | (10,654 | ) | (3,400 | ) | 935 | (2,465 | ) | ||||||||||||||
Defined benefit pension and postretirement plan adjustments | 998 | (43 | ) | 955 | 2,182 | (143 | ) | 2,039 | ||||||||||||||||
Unrealized gain (loss) on derivative contracts | 1,297 | 468 | 1,765 | 3,396 | (1,158 | ) | 2,238 | |||||||||||||||||
Total OCI | 18,466 | 4,672 | 23,138 | (14,482 | ) | 1,758 | (12,724 | ) | ||||||||||||||||
Less: OCI attributable to NCI | 2,421 | — | 2,421 | (279 | ) | — | (279 | ) | ||||||||||||||||
OCI attributable to Fluor Corporation | $ | 16,045 | $ | 4,672 | $ | 20,717 | $ | (14,203 | ) | $ | 1,758 | $ | (12,445 | ) | ||||||||||
Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||
(in thousands) | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | ||||||||||||||||||
OCI: | ||||||||||||||||||||||||
Foreign currency translation adjustments | $ | (80,029 | ) | $ | — | $ | (80,029 | ) | $ | 27,621 | $ | 39 | $ | 27,660 | ||||||||||
Ownership share of equity method investees’ OCI | (17,420 | ) | (1,406 | ) | (18,826 | ) | (6,895 | ) | 2,108 | (4,787 | ) | |||||||||||||
Defined benefit pension and postretirement plan adjustments | 2,001 | — | 2,001 | 4,392 | (289 | ) | 4,103 | |||||||||||||||||
Unrealized gain (loss) on derivative contracts | (4,577 | ) | 872 | (3,705 | ) | 8,030 | (2,335 | ) | 5,695 | |||||||||||||||
Total OCI | (100,025 | ) | (534 | ) | (100,559 | ) | 33,148 | (477 | ) | 32,671 | ||||||||||||||
Less: OCI attributable to NCI | (1,796 | ) | — | (1,796 | ) | 206 | — | 206 | ||||||||||||||||
OCI attributable to Fluor Corporation | $ | (98,229 | ) | $ | (534 | ) | $ | (98,763 | ) | $ | 32,942 | $ | (477 | ) | $ | 32,465 | ||||||||
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The changes in AOCI balances follow:
(in thousands) | Foreign Currency Translation | Ownership Share of Equity Method Investees’ OCI | Defined Benefit Plans | Unrealized Gain (Loss) on Derivative Contracts | AOCI, Net | ||||||||||||||
Attributable to Fluor Corporation: | |||||||||||||||||||
Balance as of March 31, 2020 | $ | (349,834 | ) | $ | (43,628 | ) | $ | (98,151 | ) | $ | (7,740 | ) | $ | (499,353 | ) | ||||
OCI before reclassifications | 28,651 | (10,786 | ) | 1 | 1,146 | 19,012 | |||||||||||||
Amounts reclassified from AOCI | — | 132 | 954 | 619 | 1,705 | ||||||||||||||
Net OCI | 28,651 | (10,654 | ) | 955 | 1,765 | 20,717 | |||||||||||||
Balance as of June 30, 2020 | $ | (321,183 | ) | $ | (54,282 | ) | $ | (97,196 | ) | $ | (5,975 | ) | $ | (478,636 | ) | ||||
Attributable to NCI: | |||||||||||||||||||
Balance as of March 31, 2020 | $ | (9,268 | ) | $ | — | $ | — | $ | — | $ | (9,268 | ) | |||||||
OCI before reclassifications | 2,421 | — | — | — | 2,421 | ||||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | ||||||||||||||
Net OCI | 2,421 | — | — | — | 2,421 | ||||||||||||||
Balance as of June 30, 2020 | $ | (6,847 | ) | $ | — | $ | — | $ | — | $ | (6,847 | ) | |||||||
(in thousands) | Foreign Currency Translation | Ownership Share of Equity Method Investees’ OCI | Defined Benefit Plans | Unrealized Gain (Loss) on Derivative Contracts | AOCI, Net | ||||||||||||||
Attributable to Fluor Corporation: | |||||||||||||||||||
Balance as of December 31, 2019 | $ | (242,950 | ) | $ | (35,456 | ) | $ | (99,197 | ) | $ | (2,270 | ) | $ | (379,873 | ) | ||||
OCI before reclassifications | (78,233 | ) | (19,099 | ) | 1 | (4,105 | ) | (101,436 | ) | ||||||||||
Amounts reclassified from AOCI | — | 273 | 2,000 | 400 | 2,673 | ||||||||||||||
Net OCI | (78,233 | ) | (18,826 | ) | 2,001 | (3,705 | ) | (98,763 | ) | ||||||||||
Balance as of June 30, 2020 | $ | (321,183 | ) | $ | (54,282 | ) | $ | (97,196 | ) | $ | (5,975 | ) | $ | (478,636 | ) | ||||
Attributable to NCI: | |||||||||||||||||||
Balance as of December 31, 2019 | $ | (5,051 | ) | $ | — | $ | — | $ | — | $ | (5,051 | ) | |||||||
OCI before reclassifications | (1,796 | ) | — | — | — | (1,796 | ) | ||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | ||||||||||||||
Net OCI | (1,796 | ) | — | — | — | (1,796 | ) | ||||||||||||
Balance as of June 30, 2020 | $ | (6,847 | ) | $ | — | $ | — | $ | — | $ | (6,847 | ) | |||||||
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(in thousands) | Foreign Currency Translation | Ownership Share of Equity Method Investees’ OCI | Defined Benefit Plans | Unrealized Gain (Loss) on Derivative Contracts | AOCI, Net | ||||||||||||||
Attributable to Fluor Corporation: | |||||||||||||||||||
Balance as of March 31, 2019 | $ | (268,089 | ) | $ | (25,994 | ) | $ | (202,585 | ) | $ | (1,953 | ) | $ | (498,621 | ) | ||||
OCI before reclassifications | (14,257 | ) | (2,606 | ) | — | 1,629 | (15,234 | ) | |||||||||||
Amounts reclassified from AOCI | — | 141 | 2,039 | 609 | 2,789 | ||||||||||||||
Net OCI | (14,257 | ) | (2,465 | ) | 2,039 | 2,238 | (12,445 | ) | |||||||||||
Balance as of June 30, 2019 | $ | (282,346 | ) | $ | (28,459 | ) | $ | (200,546 | ) | $ | 285 | $ | (511,066 | ) | |||||
Attributable to NCI: | |||||||||||||||||||
Balance as of March 31, 2019 | $ | (3,216 | ) | $ | — | $ | — | $ | — | $ | (3,216 | ) | |||||||
OCI before reclassifications | (279 | ) | — | — | — | (279 | ) | ||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | ||||||||||||||
Net OCI | (279 | ) | — | — | — | (279 | ) | ||||||||||||
Balance as of June 30, 2019 | $ | (3,495 | ) | $ | — | $ | — | $ | — | $ | (3,495 | ) | |||||||
(in thousands) | Foreign Currency Translation | Ownership Share of Equity Method Investees’ OCI | Defined Benefit Plans | Unrealized Gain (Loss) on Derivative Contracts | AOCI, Net | ||||||||||||||
Attributable to Fluor Corporation: | |||||||||||||||||||
Balance as of December 31, 2018 | $ | (309,800 | ) | $ | (23,672 | ) | $ | (204,649 | ) | $ | (5,410 | ) | $ | (543,531 | ) | ||||
OCI before reclassifications | 27,454 | (5,070 | ) | — | 4,325 | 26,709 | |||||||||||||
Amounts reclassified from AOCI | — | 283 | 4,103 | 1,370 | 5,756 | ||||||||||||||
Net OCI | 27,454 | (4,787 | ) | 4,103 | 5,695 | 32,465 | |||||||||||||
Balance as of June 30, 2019 | $ | (282,346 | ) | $ | (28,459 | ) | $ | (200,546 | ) | $ | 285 | $ | (511,066 | ) | |||||
Attributable to NCI: | |||||||||||||||||||
Balance as of December 31, 2018 | $ | (3,701 | ) | $ | — | $ | — | $ | — | $ | (3,701 | ) | |||||||
OCI before reclassifications | 206 | — | — | — | 206 | ||||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | ||||||||||||||
Net other comprehensive income (loss) | 206 | — | — | — | 206 | ||||||||||||||
Balance as of June 30, 2019 | $ | (3,495 | ) | $ | — | $ | — | $ | — | $ | (3,495 | ) | |||||||
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Information about reclassifications out of AOCI follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
(in thousands) | Location in Statement of Operations | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Component of AOCI: | ||||||||||||||||||
Ownership share of equity method investees’ OCI | Cost of revenue | $ | (176 | ) | $ | (188 | ) | $ | (364 | ) | $ | (377 | ) | |||||
Income tax benefit | Income tax expense (benefit) | 44 | 47 | 91 | 94 | |||||||||||||
Net of tax | $ | (132 | ) | $ | (141 | ) | $ | (273 | ) | $ | (283 | ) | ||||||
Defined benefit pension plan adjustments | Corporate G&A | $ | (998 | ) | $ | (2,182 | ) | $ | (2,000 | ) | $ | (4,392 | ) | |||||
Income tax benefit | Income tax expense (benefit) | 44 | 143 | — | 289 | |||||||||||||
Net of tax | $ | (954 | ) | $ | (2,039 | ) | $ | (2,000 | ) | $ | (4,103 | ) | ||||||
Unrealized gain (loss) on derivative contracts: | ||||||||||||||||||
Commodity and foreign currency contracts | Various accounts(1) | $ | (240 | ) | $ | (617 | ) | $ | 402 | $ | (1,462 | ) | ||||||
Interest rate contracts | Interest expense | (419 | ) | (419 | ) | (838 | ) | (839 | ) | |||||||||
Income tax benefit | Income tax expense (benefit) | 40 | 427 | 36 | 931 | |||||||||||||
Net of tax | $ | (619 | ) | $ | (609 | ) | $ | (400 | ) | $ | (1,370 | ) | ||||||
(1) | Gains and losses on commodity and foreign currency derivative contracts were reclassified to "Cost of revenue" and "Corporate G&A". |
19. Discontinued Operations
We expect to complete the sale of the AMECO equipment business, which is reported in Disc Ops, within the first half of 2021. The assets and liabilities of the AMECO business are classified as held for sale. Due to the impact of COVID-19 and the steep decline in oil prices on the AMECO business during the first quarter of 2020, we recognized impairment expense of $100 million, of which $12 million related to goodwill, to write down the AMECO assets held for sale to fair value less cost to sell. The fair value of the AMECO assets were determined using a combination of observable level 2 inputs, including indicative offers and ongoing negotiations for the related assets.
The legal fees associated with a previously divested business were reported in Disc Ops under "Other".
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Disc Ops information follows:
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | |||||||||||||||||||||||
(in thousands) | AMECO | Other | Total | AMECO | Other | Total | ||||||||||||||||||
Revenue | $ | 50,667 | $ | — | $ | 50,667 | $ | 62,820 | $ | — | $ | 62,820 | ||||||||||||
Cost of revenue | 44,512 | — | 44,512 | 80,746 | — | 80,746 | ||||||||||||||||||
Corporate general and administrative expense | 37 | 3,679 | 3,716 | 71 | 2,904 | 2,975 | ||||||||||||||||||
Interest expense (income), net | 10 | — | 10 | (97 | ) | — | (97 | ) | ||||||||||||||||
Total cost and expenses | 44,559 | 3,679 | 48,238 | 80,720 | 2,904 | 83,624 | ||||||||||||||||||
Earnings (loss) before taxes from Disc Ops | 6,108 | (3,679 | ) | 2,429 | (17,900 | ) | (2,904 | ) | (20,804 | ) | ||||||||||||||
Income tax expense (benefit) | 485 | — | 485 | (3,542 | ) | (671 | ) | (4,213 | ) | |||||||||||||||
Net earnings (loss) from Disc Ops | 5,623 | (3,679 | ) | 1,944 | (14,358 | ) | (2,233 | ) | (16,591 | ) | ||||||||||||||
Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||
(in thousands) | AMECO | Other | Total | AMECO | Other | Total | ||||||||||||||||||
Revenue | $ | 111,206 | $ | — | $ | 111,206 | $ | 124,606 | $ | — | $ | 124,606 | ||||||||||||
Cost of revenue | 92,783 | — | 92,783 | 141,366 | — | 141,366 | ||||||||||||||||||
Corporate general and administrative expense | 51 | 9,381 | 9,432 | 150 | 4,919 | 5,069 | ||||||||||||||||||
Impairment of assets held for sale | 100,000 | — | 100,000 | — | — | — | ||||||||||||||||||
Interest expense (income), net | (40 | ) | — | (40 | ) | (172 | ) | — | (172 | ) | ||||||||||||||
Total cost and expenses | 192,794 | 9,381 | 202,175 | 141,344 | 4,919 | 146,263 | ||||||||||||||||||
Earnings (loss) before taxes from Disc Ops | (81,588 | ) | (9,381 | ) | (90,969 | ) | (16,738 | ) | (4,919 | ) | (21,657 | ) | ||||||||||||
Income tax expense (benefit) | 1,942 | — | 1,942 | (3,115 | ) | (1,137 | ) | (4,252 | ) | |||||||||||||||
Net earnings (loss) from Disc Ops | (83,530 | ) | (9,381 | ) | (92,911 | ) | (13,623 | ) | (3,782 | ) | (17,405 | ) | ||||||||||||
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The carrying amounts of the major classes of assets and liabilities of Disc Ops and classified as held for sale as of June 30, 2020 and December 31, 2019 follow:
June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
(in thousands) | AMECO | Other | Total from Disc Ops | Other Assets and Liabilities from Cont Ops | Total | AMECO | Other | Total from Disc Ops | Other Assets and Liabilities from Cont Ops | Total | ||||||||||||||||||||||
Accounts and notes receivable, net | $ | 55,749 | $ | 15,925 | $ | 71,674 | $ | 11,913 | $ | 83,587 | $ | 69,126 | $ | 15,925 | $ | 85,051 | $ | 17,513 | $ | 102,564 | ||||||||||||
Contract assets | 2,157 | — | 2,157 | 4,177 | 6,334 | 3,497 | — | 3,497 | 3,779 | 7,276 | ||||||||||||||||||||||
Other current assets | 45,109 | — | 45,109 | 6,677 | 51,786 | 54,116 | — | 54,116 | 8,112 | 62,228 | ||||||||||||||||||||||
Current assets held for sale | $ | 103,015 | $ | 15,925 | $ | 118,940 | $ | 22,767 | $ | 141,707 | $ | 126,739 | $ | 15,925 | $ | 142,664 | $ | 29,404 | $ | 172,068 | ||||||||||||
Property, plant and equipment, net | $ | 131,567 | $ | — | $ | 131,567 | $ | 59,132 | $ | 190,699 | $ | 232,792 | $ | — | $ | 232,792 | $ | 64,792 | $ | 297,584 | ||||||||||||
Goodwill | 37 | — | 37 | 6,087 | 6,124 | 12,338 | — | 12,338 | 9,295 | 21,633 | ||||||||||||||||||||||
Investments | — | — | — | 6,838 | 6,838 | — | — | — | 7,293 | 7,293 | ||||||||||||||||||||||
Other assets | 9,014 | — | 9,014 | 14,453 | 23,467 | 5,868 | — | 5,868 | 12,654 | 18,522 | ||||||||||||||||||||||
Noncurrent assets held for sale(1) | $ | 140,618 | $ | — | $ | 140,618 | $ | 86,510 | $ | 227,128 | $ | 250,998 | $ | — | $ | 250,998 | $ | 94,034 | $ | 345,032 | ||||||||||||
Total assets held for sale | $ | 243,633 | $ | 15,925 | $ | 259,558 | $ | 109,277 | $ | 368,835 | $ | 377,737 | $ | 15,925 | $ | 393,662 | $ | 123,438 | $ | 517,100 | ||||||||||||
Accounts payable | $ | 10,884 | $ | 23 | $ | 10,907 | $ | 7,739 | $ | 18,646 | $ | 24,692 | $ | — | $ | 24,692 | $ | 6,702 | $ | 31,394 | ||||||||||||
Contract liabilities | 139 | — | 139 | 25 | 164 | 4,466 | — | 4,466 | 25 | 4,491 | ||||||||||||||||||||||
Accrued salaries, wages and benefits | 7,772 | — | 7,772 | 107 | 7,879 | 8,913 | — | 8,913 | 919 | 9,832 | ||||||||||||||||||||||
Other accrued liabilities | 11,744 | — | 11,744 | 6,981 | 18,725 | 9,451 | — | 9,451 | 11,562 | 21,013 | ||||||||||||||||||||||
Current liabilities held for sale | $ | 30,539 | $ | 23 | $ | 30,562 | $ | 14,852 | $ | 45,414 | $ | 47,522 | $ | — | $ | 47,522 | $ | 19,208 | $ | 66,730 | ||||||||||||
Noncurrent liabilities held for sale(1) | $ | 6,283 | $ | — | $ | 6,283 | $ | 10,581 | $ | 16,864 | $ | 4,272 | $ | — | $ | 4,272 | $ | 11,320 | $ | 15,592 | ||||||||||||
Total liabilities held for sale | $ | 36,822 | $ | 23 | $ | 36,845 | $ | 25,433 | $ | 62,278 | $ | 51,794 | $ | — | $ | 51,794 | $ | 30,528 | $ | 82,322 | ||||||||||||
(1) | Noncurrent assets and liabilities held for sale were classified as current as we expect to complete the sale of the AMECO business within the first half of 2021. |
Capital expenditures from Disc Ops were $12 million and $44 million during the 2020 Period and 2019 Period, respectively.
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FLUOR CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and our 2019 10-K. Except as the context otherwise requires, the terms Fluor or the Registrant, as used herein, are references to Fluor Corporation and its predecessors and references to the company, we, us, or our as used herein shall include Fluor Corporation, its consolidated subsidiaries and joint ventures.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made herein, including statements regarding our projected revenue and earnings levels, cash flow and liquidity, new awards and backlog levels and the implementation of strategic initiatives are forward-looking in nature. Under the Private Securities Litigation Reform Act of 1995, a “safe harbor” may be provided to us for certain of these forward-looking statements. We wish to caution readers that forward-looking statements, including disclosures which use words such as we “believe,” “anticipate,” “expect,” “estimate” and similar statements, are subject to various risks and uncertainties which could cause actual results of operations to differ materially from expectations. Factors potentially contributing to such differences include, among others:
• | The severity and duration of the COVID-19 pandemic and actions by governments, businesses and individuals in response to the pandemic; |
• | The cyclical nature of many of the markets we serve, including our commodity-based business lines, and our client’s vulnerability to downturns, which may result in decreased capital investment or expenditures and reduced demand for our services; |
• | Our failure to receive anticipated new contract awards and the related impact on revenue, earnings, staffing levels and cost; |
• | Failure to accurately estimate the cost and schedule for our contracts, resulting in cost overruns or liabilities, including those related to project delays and those caused by the performance of our clients, subcontractors, suppliers and joint venture or teaming partners; |
• | Failure to remediate material weaknesses in our internal controls over financial reporting or the failure to maintain an effective system of internal controls; |
• | Failure to prepare and timely file our periodic reports, which limits our access to public markets to raise debt and equity capital and restricts our ability to issue equity securities; |
• | The restatement of certain of our previously issued consolidated financial statements, which may result in unanticipated costs and may affect investor confidence and our reputation; |
• | Intense competition in the global engineering, procurement and construction industry, which can place downward pressure on our contract prices and profit margins and may increase our contractual risks; |
• | Failure to obtain favorable results in existing or future litigation, regulatory proceedings or dispute resolution proceedings (including claims for indemnification), or claims against project owners, subcontractors or suppliers; |
• | Failure of our joint venture partners to perform their venture obligations, which could impact the success of those ventures and impose additional financial and performance obligations on us, resulting in reduced profits or losses; |
• | Cybersecurity breaches of our systems and information technology; |
• | Civil unrest, security issues, labor conditions and other unforeseeable events in the countries in which we do business, resulting in unanticipated losses; |
• | Changes in global business, economic (including currency risk), political and social conditions; |
• | Project cancellations, scope adjustments or deferrals, or foreign currency fluctuations, that could reduce the amount of our backlog and the revenue and profits that we earn; |
• | Failure to maintain safe work sites; |
• | Repercussions of events beyond our control, such as severe weather conditions, natural disasters, pandemics, political crises or other catastrophic events, that may significantly affect operations, result in higher cost or subject the company to liability claims by our clients; |
• | Differences between our actual results and the assumptions and estimates used to prepare our financial statements; |
• | Client delays or defaults in making payments; |
• | Failure of our suppliers or subcontractors to provide supplies or services at the agreed-upon levels or times; |
• | The availability of credit and restrictions imposed by credit facilities, both for the company and our clients, suppliers, |
subcontractors or other partners;
• | Possible limitations of bonding or letter of credit capacity; |
• | Failure to successfully implement our strategic and operational initiatives; |
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• | The risks associated with acquisitions, dispositions or other investments, including the failure to successfully integrate acquired businesses; |
• | Uncertainties, restrictions and regulations impacting our government contracts; |
The inability to hire or retain qualified personnel;
• | The potential impact of changes in tax laws and other tax matters including, but not limited to, those from foreign operations, the realizability of our deferred tax assets and the ongoing audits by tax authorities; |
• | Possible systems and information technology interruptions; |
• | The impact of anti-bribery and international trade laws and regulations; |
• | Failure of our employees, agents or partners to comply with laws, which could result in harm to our reputation and reduced profits or losses; |
•Our ability to secure appropriate insurance;
• | The impact of new or changing legal requirements, as well as past and future environmental, health and safety regulations including climate change regulations; |
• | The failure to be adequately indemnified for our nuclear services; |
• | Foreign exchange risks; |
• | The loss of business from one or more significant clients; |
• | The failure to adequately protect intellectual property rights; |
• | Impairments to goodwill, investments, deferred tax assets or other intangible assets; and |
• | Restrictions on possible transactions imposed by our charter documents, Delaware law and our stockholder rights agreement. |
Any forward-looking statements that we may make are based on our current expectations and beliefs concerning future developments and their potential effects on us. We can provide no assurance that future developments affecting us will be those anticipated by us. Any forward-looking statements are subject to the risks, uncertainties and other factors that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements.
Our actual results may differ materially from its expectations or projections. While most risks affect only future cost or revenue anticipated by the company, some risks may relate to accruals that have already been reflected in earnings. Our failure to receive payments of accrued amounts or incurrence of liabilities in excess of amounts previously recognized could result in charges against future earnings. As a result, we caution users of our financial information to recognize and consider the inherently uncertain nature of forward-looking statements and not to place undue reliance on them.
Additional information concerning these and other factors can be found in our press releases and periodic filings with the SEC, including the discussion under the heading “Item 1A. — Risk Factors” in the 2019 10-K. These filings are available publicly on the SEC’s website at http://www.sec.gov, on our website at http://investor.fluor.com or upon request from our Investor Relations Department at (469) 398-7070. We cannot control such risks and other uncertainties, and in many cases, cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties should be considered when evaluating us and deciding whether to invest in our securities. Except as otherwise required by law, we undertake no obligation to publicly update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.
Results of Operations
In the beginning of 2020, we decided to retain our government business, which had been included in Disc Ops since the third quarter of 2019. As a result, the government business is no longer reported as a discontinued operation for any period presented. Our plan to sell the AMECO equipment business remains unchanged and it remains reported as a discontinued operation. We expect to complete the sale of the AMECO equipment business within the first half of 2021. The assets and liabilities of the AMECO business are classified as held for sale for all periods presented.
In light of our decision to retain our government business, we now report our operating results in the following six reportable segments:
◦Energy & Chemicals
◦Mining & Industrial
◦Infrastructure & Power
◦Government
◦Diversified Services
◦Other
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Energy & Chemicals | $ | 1,495.9 | $ | 1,398.9 | $ | 2,851.4 | $ | 2,873.6 | ||||||||||||||||
Mining & Industrial | 1,013.0 | 1,278.3 | 2,186.9 | 2,329.6 | ||||||||||||||||||||
Infrastructure & Power | 474.7 | 229.4 | 860.5 | 573.4 | ||||||||||||||||||||
Government | 701.8 | 721.9 | 1,419.4 | 1,478.0 | ||||||||||||||||||||
Diversified Services | 382.9 | 514.9 | 840.1 | 1,003.3 | ||||||||||||||||||||
Other | 22.7 | 3.0 | 51.2 | 22.1 | ||||||||||||||||||||
Total revenue | $ | 4,091.0 | $ | 4,146.4 | $ | 8,209.5 | $ | 8,280.0 | ||||||||||||||||
Segment profit (loss) $ and margin % | ||||||||||||||||||||||||
Energy & Chemicals | $ | 41.0 | 2.7 | % | $ | (222.0 | ) | (15.9 | )% | $ | 34.6 | 1.2 | % | $ | (209.8 | ) | (7.3 | )% | ||||||
Mining & Industrial | 29.8 | 2.9 | % | 44.7 | 3.5 | % | 68.4 | 3.1 | % | 72.2 | 3.1 | % | ||||||||||||
Infrastructure & Power | 3.5 | 0.7 | % | (167.2 | ) | (72.9 | )% | 8.7 | 1.0 | % | (189.0 | ) | (33.0 | )% | ||||||||||
Government | 10.5 | 1.5 | % | 26.4 | 3.7 | % | 41.4 | 2.9 | % | 64.8 | 4.4 | % | ||||||||||||
Diversified Services | (4.8 | ) | (1.3 | )% | 3.0 | 0.6 | % | 0.3 | — | % | 11.7 | 1.2 | % | |||||||||||
Other | (19.3 | ) | (85.0 | )% | (77.4 | ) | NM | (40.8 | ) | (79.7 | )% | (103.5 | ) | NM | ||||||||||
Total segment profit (loss) $ and margin %(1) | $ | 60.7 | 1.5 | % | $ | (392.5 | ) | (9.5 | )% | $ | 112.6 | 1.4 | % | $ | (353.6 | ) | (4.3 | )% | ||||||
Corporate G&A | (39.7 | ) | (49.9 | ) | (25.7 | ) | (108.6 | ) | ||||||||||||||||
Impairment, restructuring and other exit costs | (5.1 | ) | (26.7 | ) | (302.6 | ) | (54.0 | ) | ||||||||||||||||
Interest expense, net | (11.7 | ) | (4.1 | ) | (18.0 | ) | (9.8 | ) | ||||||||||||||||
Earnings (loss) attributable to NCI from Cont Ops | 6.7 | (38.7 | ) | 16.2 | (14.8 | ) | ||||||||||||||||||
Earnings (loss) from Cont Ops before taxes | 10.9 | (511.9 | ) | (217.5 | ) | (540.8 | ) | |||||||||||||||||
Income tax (expense) benefit | (31.1 | ) | 75.8 | 35.7 | 60.5 | |||||||||||||||||||
Net earnings (loss) from Cont Ops | $ | (20.2 | ) | $ | (436.1 | ) | $ | (181.8 | ) | $ | (480.3 | ) | ||||||||||||
New awards | ||||||||||||||||||||||||
Energy & Chemicals | $ | 197.3 | $ | 731.7 | 1,739.6 | 1,734.4 | ||||||||||||||||||
Mining & Industrial | 729.2 | 493.5 | 2,329.7 | 1,216.7 | ||||||||||||||||||||
Infrastructure & Power | 61.3 | 16.4 | 68.6 | 549.5 | ||||||||||||||||||||
Government | 941.3 | 543.1 | 1,625.3 | 723.4 | ||||||||||||||||||||
Diversified Services | 262.0 | 573.8 | 619.0 | 1,383.6 | ||||||||||||||||||||
Other | — | 0.5 | — | 151.6 | ||||||||||||||||||||
Total new awards | $ | 2,191.1 | $ | 2,359.0 | $ | 6,382.2 | $ | 5,759.2 | ||||||||||||||||
New awards related to projects located outside of the U.S. | 56% | 56% | ||||||||||||||||||||||
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Backlog | June 30, 2020 | December 31, 2019 | ||||||
Energy & Chemicals | $ | 12,358.5 | $ | 14,128.9 | ||||
Mining & Industrial | 5,235.6 | 5,383.9 | ||||||
Infrastructure & Power | 5,212.5 | 6,079.4 | ||||||
Government | 3,817.6 | 3,556.1 | ||||||
Diversified Services | 2,230.4 | 2,541.6 | ||||||
Other | 178.5 | 244.0 | ||||||
Total backlog | $ | 29,033.1 | $ | 31,933.9 | ||||
Backlog related to projects located outside of the U.S. | 63% | 67% | ||||||
(1) | Total segment profit (loss) is a non-GAAP financial measure. We believe that total segment profit (loss) provides a meaningful perspective on our results as it is the aggregation of individual segment profit (loss) measures that we use to evaluate and manage our performance. |
Our business has been adversely affected by the economic impacts of the outbreak of COVID-19 and the steep decline in commodity prices that occurred in the early part of 2020. Both of these events have created significant uncertainty and economic volatility and disruption, which have impacted and may continue to impact our business. We have experienced, and may continue to experience, reductions in demand for certain of our services and the delay or abandonment of ongoing or anticipated projects due to our clients’, suppliers’ and other third parties’ diminished financial condition or financial distress, as well as governmental budget constraints. These impacts are expected to continue or worsen if stay-at-home, social distancing, travel restrictions and other similar orders or restrictions remain in place for an extended period of time or are re-imposed after being relaxed. Significant uncertainty still exists concerning the magnitude of the impact and duration of these events. Because of these events, we performed interim impairment testing of our goodwill, intangible assets and investments. We also evaluated the impact of these events on our reserves for credit risk and the fair value of our assets held for sale.
During the first quarter of 2020, we recognized the following significant charges:
• | $298 million for impairments of goodwill, intangible assets, investments and other assets; |
• | $55 million for current expected credit losses associated with Energy & Chemical clients; |
• | $52 million for project positions for potential COVID-19 related schedule delays and associated cost growth; and |
• | $100 million for impairments of assets held for sale (included in Disc Ops), of which $12 million related to goodwill. |
During the 2019 Quarter and 2019 Period, we recognized charges (related to cumulative catch up adjustments and loss projects) totaling $532 million and $662 million, respectively, in the Energy & Chemicals, Infrastructure & Power and Other segments. We also recognized $27 million and $54 million related to impairments, restructuring and other exit costs during the 2019 Quarter and 2019 Period, respectively.
The effective tax rate on earnings (loss) from Cont Ops was 285.7% for the 2020 Quarter and 16.4% for the 2020 Period compared to 14.8% and 11.2% for the corresponding periods of 2019. The effective tax rate for all periods was unfavorably impacted by foreign income tax rates that exceed the U.S. statutory rate of 21%, as well as the establishment or augmentation of valuation allowances against foreign tax credits and certain losses. The effective tax rate for the 2020 Period was favorably impacted by the release of valuation allowances and rate benefits resulting from the carryback of our 2019 federal net operating loss as allowed by the CARES Act, enacted on March 27, 2020. Earnings attributable to noncontrolling interests from Cont Ops, for which income taxes are not typically our responsibility, unfavorably impacted the effective tax rate for the 2019 Quarter and 2019 Period.
Our results reported by foreign subsidiaries with non-U.S. dollar functional currencies are affected by foreign currency volatility. When the U.S. dollar appreciates against the non-U.S. dollar functional currencies of these subsidiaries, our reported revenue, cost and earnings, after translation into U.S. dollars, are lower than what they would have been had the U.S. dollar depreciated against the same foreign currencies or if there had been no change in the exchange rates.
Any lack of broad based new awards could continue to put pressure on our future earning streams, particularly in the Energy & Chemicals segment. As of both June 30, 2020 and December 31, 2019, 52% of our backlog consisted of lump-sum
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contracts. Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Backlog differs from RUPO discussed elsewhere. Backlog includes the amount of revenue we expect to recognize under ongoing operations and maintenance contracts for the remainder of the current year renewal period plus up to three additional years if renewal is considered to be probable, while RUPO includes only the amount of revenue we expect to recognize under ongoing operations and maintenance contracts with definite terms and substantive termination provisions.
Segment Operations - Comparisons of the 2020 Quarter to the 2019 Quarter and the 2020 Period to the 2019 Period
Energy & Chemicals
Revenue for the 2020 Quarter increased due to the ramp up of project execution activity for a liquefied natural gas project, partially offset by a reduction in activities for two large chemicals projects nearing completion. Revenue for the 2020 Period remained flat. A decline in the volume of project execution activities for certain upstream, downstream and chemicals projects, some nearing completion, was offset by the increased project execution activity for the liquefied natural gas project.
Segment profit for the 2020 Quarter and 2020 Period significantly increased primarily due to significant revisions on several projects in 2019 discussed below. Segment profit for the 2019 Quarter was adversely impacted by charges totaling $179 million for cost growth on an offshore project, $87 million for cost growth on two downstream projects and scope reductions on a large upstream project, $26 million for the write-off of pre-contract costs and $19 million on embedded foreign currency derivatives. Segment profit for the 2020 Period was adversely affected by the recognition of reserves totaling $55 million for expected credit losses associated with certain joint venture clients that were affected by the impacts of COVID-19 and declining oil prices, as well as margin diminution on a percentage-of-completion basis of $40 million resulting from project positions taken with respect to COVID-19 related schedule delays and associated cost growth. Segment profit for the 2019 Period was adversely impacted by charges totaling $240 million for cost growth on the offshore project, $87 million for cost growth on the two downstream projects and scope reductions on the large upstream project, $26 million for the write-off of pre-contract costs, $26 million on embedded foreign currency derivatives and $31 million from the resolution of close-out matters. Excluding the items above, segment profit declined in both the 2020 Quarter and 2020 Period due to the reduced execution activity of the upstream, downstream and chemicals projects discussed above, partially offset by the increase in activity for the liquefied natural gas project. The change in segment profit margin reflects these same factors.
New awards for the 2020 Quarter significantly decreased primarily due to the impact of COVID-19 and declining commodity prices on our customers' capital spend. New awards for the 2020 Period were flat. Backlog at June 30, 2020 declined compared to December 31, 2019 due to the significant decline in new award activity and the de-recognition of a suspended downstream project.
Mining & Industrial
Revenue for the 2020 Quarter and 2020 Period decreased primarily due to a decline in volume of project execution activities for a large life sciences project and two mining projects nearing completion as well as the suspension of site activities for a large mining project in South America due to COVID-19. Full site remobilization on the South American project occurred in the fourth quarter of 2020. The revenue declines were partially offset by increased project execution activities on a metals project in North America and two advanced technologies projects.
Segment profit for the 2020 Quarter and 2020 Period decreased primarily due to the decline in activity for the large life sciences project nearing completion, partially offset by the increase in project execution activities for the projects mentioned above. The decline in segment profit for both the 2020 Quarter and 2020 Period was further driven by the suspension of site activities at the South American mining project discussed above and a reduction in execution activities at another mining project due to COVID-19 health precautions. Segment profit for both the 2020 Quarter and 2020 Period further declined due to a $13 million gain recognized during the 2019 Quarter upon the favorable resolution of a longstanding customer dispute on a mining project. The decrease in segment profit margin for the 2020 Quarter was primarily the result of the favorable resolution of the customer dispute in the prior year, partially offset by an increase in higher margin engineering work in 2020.
New awards for the 2020 Quarter and 2020 Period increased primarily due to a mining project in Chile awarded during the 2020 Quarter and a large metals project in North America awarded during the 2020 Period.
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Infrastructure & Power
Revenue for the 2020 Quarter and 2020 Period increased primarily driven by an increase in project execution activities for several infrastructure projects, including year-over-year increases of $128 million and $168 million for the 2020 Quarter and 2020 Period on the Purple Line project, which was canceled in the third quarter of 2020. The increases in revenue during 2020 were further driven by prior year forecast revisions totaling $86 million and $109 million during the 2019 Quarter and 2019 Period, respectively, for three large, power plant projects, which are now substantially complete.
Segment profit for the 2020 Quarter and 2020 Period significantly increased primarily due to recognized revisions on several power and infrastructure projects in 2019. Forecast revisions totaling $109 million and $135 million were recognized during the 2019 Quarter and 2019 Period on the three power plant projects discussed above. Forecast revisions totaling $55 million were recognized during both the 2019 Quarter and 2019 Period on several lump-sum infrastructure projects. Segment profit margin for both the 2020 Quarter and 2020 Period reflects these same factors. Lower margin contributions from certain infrastructure projects for which charges were recognized during 2019 may continue to adversely impact near term segment profit margin.
No significant awards were booked in the first half of 2020 in part due to more selectivity in pursuing such projects. Backlog at June 30, 2020 decreased compared to December 31, 2019 due to a lower level of new awards.
Government
Revenue for the 2020 Quarter and 2020 Period decreased primarily due to the completion of the Magnox project in the United Kingdom during the third quarter of 2019.
The decline in segment profit for the 2020 Quarter and 2020 Period reflects project positions taken during 2020 in recognition of the potential impacts of COVID-19, particularly as it relates to estimated fee recoveries on certain projects, as well as the completion of the Magnox project in 2019. The decrease in segment profit margin for both the 2020 Quarter and 2020 Period reflects these same factors.
New awards for the 2020 Quarter and 2020 Period increased primarily due to an extension of an environmental management contract in South Carolina. Backlog at June 30, 2020 remained relatively flat compared to December 31, 2019. Backlog included $1.6 billion and $1.9 billion of unfunded government contracts as of June 30, 2020 and December 31, 2019, respectively.
Diversified Services
As discussed elsewhere, most of the operating results of our AMECO equipment business are included in Disc Ops. The retained portion of the AMECO operations have been or are in the process of being liquidated and did not meet the qualifications of Disc Ops. These retained operations remain in the Diversified Services segment.
Revenue for the 2020 Quarter and 2020 Period decreased primarily due to significantly lower volumes in the Stork business and the staffing business resulting from reduced operations or restricted access to customer sites due to COVID-19. Revenue declines in 2020 were further driven by reduced volume from the retained AMECO operations.
Segment profit for the 2020 Quarter and 2020 Period decreased primarily driven by the reduced volumes in the Stork business and the staffing business discussed above. Segment profit in the 2019 Quarter and 2019 Period was adversely impacted by charges related to negotiations with clients and joint venture partners. The decline in segment profit margin for both the 2020 Quarter and 2020 Period also reflects these same factors.
New awards for the 2020 Quarter and 2020 Period declined primarily due to the postponement of maintenance projects due to COVID-19 and the decline in oil prices. Backlog as of June 30, 2020 declined compared to December 31, 2019 primarily due to the decrease in new award activity and exchange rate fluctuations. The equipment and staffing businesses do not report backlog or new awards.
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Other
Other includes the operations of NuScale, as well as two lump-sum, loss projects including a plant for which we serve as a subcontractor to a commercial client (the "Radford" project) and a weapons storage and maintenance facility (the "Warren" project).
Revenue for the 2020 Quarter and 2020 Period increased primarily due to increased project execution activities for both the Radford and Warren projects.
Segment loss for the 2020 Quarter and 2020 Period improved primarily due to the recognition of losses for the Radford project of $57 million and $62 million during the 2019 Quarter and 2019 Period, respectively.
NuScale expenses, net of qualified reimbursable expenses, included in the determination of segment loss, were $18 million and $41 million for the 2020 Quarter and 2020 Period, respectively, compared to $18 million and $34 million for the 2019 Quarter and 2019 Period, respectively.
Corporate and Other Matters
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Corporate G&A | |||||||||||||||
Compensation | $ | 26.7 | $ | 34.9 | $ | 45.5 | $ | 67.8 | |||||||
Foreign currency (gains) losses | (0.9 | ) | (1.0 | ) | (45.0 | ) | 18.0 | ||||||||
Other | 13.9 | 16.0 | 25.2 | 22.8 | |||||||||||
Corporate G&A | $ | 39.7 | $ | 49.9 | $ | 25.7 | $ | 108.6 | |||||||
Lower levels of compensation expense were recognized during both the 2020 Quarter and 2020 Period primarily due to the deferral of issuing long-term incentive awards until the latter half of 2020, as compared to the 2019 Quarter and 2019 Period. During the 2020 Period, most major foreign currencies weakened against the U.S. dollar resulting in foreign currency exchange gains. During the 2019 Period, most major foreign currencies strengthened against the U.S. dollar resulting in foreign currency exchange losses.
The increase in net interest expense for both the 2020 Quarter and 2020 Period was attributable to a decrease in interest income from time deposits in 2020.
Critical Accounting Policies and Estimates
Fair Value Measurements. We are often required to use fair value measurement techniques with inputs that require the use of estimates and involve significant judgment. These circumstances include:
• Annual and interim goodwill impairment testing of reporting units when quantitative analysis is deemed necessary
• Impairment testing of intangible assets when impairment indicators are present
• | Impairment testing of investments as part of other than temporary impairment assessments when impairment indicators are present |
• Fair value assessments of businesses held for sale that are reported at fair value less cost to sell
• Purchase price allocations for acquired businesses
When performing quantitative fair value or impairment evaluations, we estimate the fair value of our assets by taking into consideration the results of both income-based and market-based valuation approaches. Under the income approach, we prepare a discounted cash flow valuation model using recent forecasts and compare the estimated fair value of each asset to its carrying value. Cash flow forecasts are discounted using the weighted-average cost of capital for the applicable reporting unit at the date of evaluation. The weighted-average cost of capital is comprised of the cost of equity and the cost of debt with a weighting for each that reflects our current capital structure. Preparation of long-term forecasts involve significant judgments involving consideration of our backlog, expected future awards, customer attribution, working capital assumptions, and general market trends and conditions. Significant changes in these forecasts or any valuation assumptions, such as the discount rate selected, could affect the estimated fair value of our assets and could result in impairment expenses. Under the
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market approach, we consider market information such as multiples of comparable publicly traded companies and/or completed sales transactions to develop or validate our fair value conclusions, when appropriate and available.
Due to the impact of COVID-19 and decline in commodity prices on our operations through the date of this filing, we performed interim impairment testing of our goodwill, intangibles and certain other investments and recognized impairment expenses during the first quarter of 2020 of $169 million, $27 million and $86 million, respectively. All other factors being equal, a one hundred basis point change in the discount rates used in these valuations would change the fair value of these assets by $47 million, $2 million and $3 million, respectively.
Recent Accounting Pronouncements
See the Notes to Financial Statements.
Litigation and Matters in Dispute Resolution
See the Notes to Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity is provided by available cash and cash equivalents and marketable securities, cash generated from operations, credit facilities and, when necessary, access to capital markets. We have both committed and uncommitted lines of credit available to be used for revolving loans and letters of credit. We believe that for at least the next 12 months, cash generated from operations, along with our unused credit capacity and cash position, is sufficient to support operating requirements. However, we regularly review our sources and uses of liquidity and may pursue opportunities to increase our liquidity position. Our committed credit facilities contain customary financial and restrictive covenants, including the timely filing of financial statements and a debt-to-capitalization ratio that cannot exceed 0.6 to 1.0. In order to accommodate the delays in filing our financial statements, we have entered into amendments with our lenders to extend the deadline for providing the second quarter financial information to November 30 and to extend the third quarter deadline to December 31, 2020, and we believe that we will satisfy the extended deadlines. As of June 30, 2020, our financial covenants limit our borrowings to approximately $632 million under the committed credit facilities, although no amounts were drawn. Future losses and impairment expenses could further reduce the amount of available credit capacity under our committed facilities.
In August 2020, we received a notice of default from the trustee under the indenture governing all of our Senior Notes arising from the delay in the filing of the 2019 10-K and the Q1 2020 10-Q. Upon the filing of the 2019 10-K on September 25, 2020 and the Q1 2020 10-Q on October 22, 2020, we have satisfied these reporting requirements under the indenture. In September 2020, we received a second notice of default from the trustee arising from the delay in the filing of this Q2 2020 10-Q. Under the indenture, we have until December 22, 2020 to provide the required information which is accomplished via the filing of this Q2 2020 10-Q.
Cash and cash equivalents combined with marketable securities were $2.0 billion as of both June 30, 2020 and December 31, 2019. Cash and cash equivalents are held in numerous accounts throughout the world to fund our global project execution activities. Non-U.S. cash and cash equivalents amounted to $1.1 billion and $944 million as of June 30, 2020 and December 31, 2019, respectively. Non-U.S. cash and cash equivalents exclude deposits of U.S. legal entities that are either swept into overnight, offshore accounts or invested in offshore, short-term time deposits, to which there is unrestricted access.
In evaluating our liquidity needs, we consider cash and cash equivalents held by our consolidated variable interest entities (joint ventures and partnerships). These amounts (which totaled $547 million and $393 million as of June 30, 2020 and December 31, 2019, respectively) were not necessarily readily available for general purposes. We also consider the extent to which client advances (which totaled $72 million and $69 million as of June 30, 2020 and December 31, 2019, respectively) are likely to be sustained or consumed over the near term for project execution activities and the cash flow requirements of our various foreign operations. In some cases, it may not be financially efficient to move cash and cash equivalents between countries due to statutory dividend limitations and/or adverse tax consequences. We did not consider any cash to be permanently reinvested overseas as of June 30, 2020 and December 31, 2019, other than unremitted earnings required to meet our working capital and long-term investment needs in foreign jurisdictions where we operates.
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Cash Flows
Six Months Ended June 30, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
OPERATING CASH FLOW | $ | 64,088 | $ | 91,435 | ||||
INVESTING CASH FLOW | ||||||||
Proceeds from sales and maturities (purchases) of marketable securities | (5,500 | ) | 141,555 | |||||
Capital expenditures | (58,959 | ) | (100,840 | ) | ||||
Proceeds from sales of property, plant and equipment | 24,348 | 25,179 | ||||||
Investments in partnerships and joint ventures | (24,022 | ) | (27,056 | ) | ||||
Other | 4,534 | 5,164 | ||||||
Investing cash flow | (59,599 | ) | 44,002 | |||||
FINANCING CASH FLOW | ||||||||
Dividends paid | (28,720 | ) | (59,324 | ) | ||||
Other borrowings | 20,567 | 12,637 | ||||||
Distributions paid to NCI | (10,831 | ) | (15,572 | ) | ||||
Capital contributions by NCI | 39,520 | 7,821 | ||||||
Other | (2,748 | ) | (3,371 | ) | ||||
Financing cash flow | 17,788 | (57,809 | ) | |||||
Effect of exchange rate changes on cash | (49,883 | ) | 14,911 | |||||
Increase (decrease) in cash and cash equivalents | (27,606 | ) | 92,539 | |||||
Cash and cash equivalents at beginning of period | 1,997,199 | 1,764,746 | ||||||
Cash and cash equivalents at end of period | $ | 1,969,593 | $ | 1,857,285 | ||||
Operating Activities
Cash flows from operating activities result primarily from earnings sources and are affected by changes in operating assets and liabilities which consist primarily of working capital balances for projects. Working capital levels vary from period to period and are primarily affected by our volume of work. These levels are also impacted by the stage of completion and commercial terms of engineering and construction projects, as well as our execution of its projects within budget. Working capital requirements also vary by project and the payments terms agreed to with our clients, vendors and subcontractors. Most contracts require payments as the projects progress. Additionally, certain projects receive advance payments from clients. A normal trend for these projects is to have higher cash balances during the initial phases of execution which then level out toward the end of the construction phase. As a result, our cash position is reduced as customer advances are utilized, unless they are replaced by advances on other projects. We maintain cash reserves and borrowing facilities to provide additional working capital in the event that a project’s net operating cash outflows exceed its available cash balances.
During the 2020 Period, working capital increased. Specific factors related to the change in working capital include:
• | Decreases in contract assets in the Energy & Chemicals and Mining & Industrial segments, which resulted primarily from normal project execution activities. |
• | Decreases in accounts payable in the Energy & Chemicals, Mining & Industrial and Diversified Services segments, which resulted primarily from normal invoicing and payment activities for several projects. |
• | A decrease in contract liabilities in the Other segment, which resulted primarily from normal project execution activities. |
• | An increase in prepaid income taxes. |
During the 2019 Period, working capital significantly decreased. Specific factors related to the change in working capital include:
• | A decrease in contract assets in the Energy & Chemicals, Mining & Industrial and Government segments, which resulted primarily from normal project execution activities for several projects including a mining project in Chile. |
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• | Decreases in accounts payable in the Mining & Industrial and Government segments, which resulted primarily from normal invoicing and payment activities. |
• | Increases in contract liabilities resulting from loss provisions and forecast adjustments for several projects in the Energy & Chemicals, Infrastructure & Power and Other segments, as well as client advances on the mining project in Chile. |
The decline in operating cash flow resulted primarily from working capital outflows in 2020 compared to working capital inflows in 2019.
Investing Activities
During the 2019 Period, proceeds from the sales and maturities of marketable securities primarily related to maturities of large time deposits at an infrastructure project as cash was needed to support project execution activities.
Capital expenditures primarily related to construction equipment associated with equipment operations now included in Disc Ops, as well as expenditures for facilities and investments in information technology. Proceeds from the disposal of property, plant and equipment primarily related to the disposal of construction equipment associated with the equipment business in Disc Ops.
Investments in unconsolidated partnerships and joint ventures during both the 2020 and 2019 Periods primarily consist of capital contributions to an infrastructure joint venture in the United States. We have a future funding commitment to COOEC Fluor of $26 million due at the end of 2020.
Financing Activities
Quarterly cash dividends were typically paid during the month following the quarter in which they were declared. Therefore, dividends declared in the fourth quarter of 2019 were paid and reported in the first quarter of 2020. We have suspended our dividend as of April 29, 2020. The payment and level of future cash dividends is subject to the discretion of our Board of Directors.
Capital contributions by NCI in 2020 and 2019 related to three infrastructure joint ventures in the United States. Distributions paid to holders of NCI in 2020 and 2019 primarily related to a mining joint venture in Chile.
Other borrowings represent short-term bank loans and other financing arrangements associated with Stork.
Effect of Exchange Rate Changes on Cash
During the 2020 Period, most major foreign currencies weakened against the U.S. dollar resulting in unrealized translation losses of $80 million, of which $50 million related to cash held by foreign subsidiaries. During the 2019 Period, most major foreign currencies strengthened against the U.S. dollar resulting in unrealized translation gains $28 million, of which $15 million related to cash held by foreign subsidiaries. The cash held in foreign currencies will primarily be used for project-related expenditures in those currencies, and therefore our exposure to exchange gains and losses is generally mitigated.
Off-Balance Sheet Arrangements
Letters of Credit
As of June 30, 2020, letters of credit totaling $463 million were outstanding under committed lines of credit and letters of credit totaling $880 million were outstanding under uncommitted lines of credit. Letters of credit are provided in the ordinary course of business primarily to indemnify our clients if we fail to perform our obligations under our contracts. Surety bonds may be used as an alternative to letters of credit.
Guarantees
In the ordinary course of business, we enter into various agreements providing performance assurances and guarantees to our clients. These agreements are entered into primarily to support project execution commitments. The performance guarantees have various expiration dates ranging from mechanical completion of the project to a period extending beyond contract completion. The maximum potential amount of future payments that we could be required to make under outstanding performance guarantees, which represents the remaining cost of work to be performed, was estimated to be $16 billion as of June 30, 2020. Amounts that may be required to be paid in excess of estimated cost to complete contracts in
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progress are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed. For lump-sum contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors for claims. The performance guarantee obligation was not material as of June 30, 2020 and December 31, 2019.
Financial guarantees, made in the ordinary course of business in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate us to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation.
Variable Interest Entities
We frequently form joint ventures or partnerships with others primarily for the execution of single contracts or projects. We assess our joint ventures and partnerships at inception to determine if any meet the qualifications of a VIE as defined in GAAP. If a joint venture or partnership is a VIE and we are the primary beneficiary, the joint venture or partnership is consolidated and our partners' interests are recognized as NCI. Additional discussion of our VIEs may be found in Item 1 of this Q2 2020 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to market risk in the first half of 2020. Accordingly, the disclosures provided in the 2019 10-K remain current.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) were not effective as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act.
In light of the material weaknesses in our ICFR, we performed extensive additional analysis and other procedures to validate that our financial information contained in this Form 10-Q was prepared in accordance with US GAAP. Following such additional analysis and procedures, our management, including our CEO and CFO, has concluded that our financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Form 10-Q, in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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FLUOR CORPORATION
CHANGES IN CONSOLIDATED BACKLOG
UNAUDITED
Three Months Ended June 30, | ||||||||
(in millions) | 2020 | 2019 | ||||||
Backlog, April 1 | $ | 31,385.7 | $ | 39,424.0 | ||||
New awards | 2,191.1 | 2,359.0 | ||||||
Adjustments and cancellations, net (1) | (477.8 | ) | (2,202.8 | ) | ||||
Work performed | (4,065.9 | ) | (4,100.2 | ) | ||||
Backlog, June 30 | $ | 29,033.1 | $ | 35,480.0 | ||||
Six Months Ended June 30, | ||||||||
(in millions) | 2020 | 2019 | ||||||
Backlog, January 1 | $ | 31,933.9 | $ | 40,050.7 | ||||
New awards | 6,382.2 | 5,759.2 | ||||||
Adjustments and cancellations, net (1) | (1,131.9 | ) | (2,145.3 | ) | ||||
Work performed | (8,151.1 | ) | (8,184.6 | ) | ||||
Backlog, June 30 | $ | 29,033.1 | $ | 35,480.0 | ||||
(1) | Adjustments and cancellations, net during the 2019 Quarter and 2019 Period included an adjustment to remove certain contracts associated with our joint venture in Mexico that were suspended during the 2019 Quarter, as well as other project scope adjustments and cancellations. |
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
As part of our normal business activities, we are party to a number of legal proceedings and other matters in various stages of development. Management periodically assesses our liabilities and contingencies in connection with these matters based upon the latest information available. We disclose material pending legal proceedings pursuant to SEC rules and other pending matters as we may determine to be appropriate.
Additional information on matters in dispute may be found in Item 8 of the 2019 10-K and Item 1 of this Q2 2020 10-Q.
Item 1A. Risk Factors
There have been no material changes from our risk factors as disclosed in the 2019 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) | The following table provides information for the quarter ended June 30, 2020 about purchases by the company of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act. |
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased under the Plans or Program (1) | |||||||||
April 1 — April 30, 2020 | — | $ | — | — | 10,513,093 | ||||||||
May 1 — May 31, 2020 | — | — | — | 10,513,093 | |||||||||
June 1 — June 30, 2020 | — | — | — | 10,513,093 | |||||||||
Total | — | $ | — | — | |||||||||
_________________________________________________________
(1) | The share repurchase program was originally announced on November 3, 2011 for 12,000,000 shares and has been amended to increase the size of the program by an aggregate 34,000,000 shares, most recently in February 2016 with an increase of 10,000,000 shares. We continue to repurchase shares from time to time in open market transactions or privately negotiated transactions, including through pre-arranged trading programs, at our discretion, subject to market conditions and other factors and at such time and in amounts that we deem appropriate. |
Item 4. Mine Safety Disclosures
None.
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Item 6. | Exhibits |
EXHIBIT INDEX
Exhibit | Description | |
3.1 | ||
3.2 | ||
3.3 | ||
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document.* | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |
104 | The cover page from the Company's Q2 2020 10-Q for the three and six months ended June 30, 2020, formatted in Inline XBRL (included in the Exhibit 101 attachments).* | |
_______________________________________________________________________
* | New exhibit filed with this report. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FLUOR CORPORATION | |||
Date: | November 12, 2020 | By: | /s/ Joseph L. Brennan |
Joseph L. Brennan | |||
Chief Financial Officer | |||
Date: | November 12, 2020 | By: | /s/ John C. Regan |
John C. Regan | |||
Chief Accounting Officer | |||
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