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Fluor (FLR): Q1 Earnings Miss, Revenues Beat; Outlook Cut

In spite of projections hinting at an earnings beat, Fluor Corporation’s FLR first quarter of 2016 were a letdown. Additionally, concurrent with the dismal market scenario, Fluor cut its 2016 full-year guidance leaving investors miffed. These adverse developments led to a 5.6% dip in the shares of the company in after-hours trading on May 5 to $51.60.

The premium heavy construction company reported adjusted earnings of 85 cents per share that missed the Zacks Consensus Estimate by a penny.

On a GAAP basis, the company reported earnings of 74 cents per share, down 22.9% from 96 cents recorded in the year-ago quarter. Significant pre-tax expenses associated with the Stork buyout proved to be a drag on earnings.

Also, the bottom-line decline worsened on account of unimpressive top-line performance stemming from reduced contribution from Energy, Chemicals and Mining segment.

Inside the Headlines

Total revenue decreased 2.7% year over year to $4,423.9 million but managed to surpass the Zacks Consensus Estimate of $4,407 million. Fall in revenues in the Energy, Chemicals & Mining segment of the company offset the improvements in the other three segments, thereby resulting in the lackluster top-line performance.

On Apr 14, 2016, the company announced plans of implementing a change in the reporting segments in order to reflect the diverse end markets of the company better. The company has condensed its business lines into four segments, namely, Energy, Chemicals & Mining, Industrial, Infrastructure & Power, Maintenance, Modification & Asset Integrity and Government from the previous Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Notably, the company has started reporting under these four segments from the first quarter of 2016.

Revenues from the Energy, Chemicals & Mining segment fell 18.1% year over year to $2,443.5 million. Softness in mining activities proved to be an overhang. 

Industrial, Infrastructure & Power segment’s revenues rose 52.4% year over year to $833.3 million. Sales of this segment largely benefited from solid execution activities on two nuclear power projects for Westinghouse Electric Company.

Revenues at the Government segment were up 6.2% year over year to $686.0 million mainly on account of profitable project wins and execution.

Maintenance, Modification & Asset Integrity revenues increased 23.6% to $461.1 million on a year-over-year basis. This segment largely benefited from the recent Stork buyout that boosted sales at the Global Services unit.

In the reported quarter, Fluor’s new awards were up 5.2% to $4.7 million on a year-over-year basis. Orders in the Government segment totaled $2.3 billion, including the Idaho Cleanup Project Core contract and a multi-year extension of the Piketon-based Portsmouth project. Orders at the Industrial, Infrastructure & Power segment were $1.4 million, including the Loop 202 South Mountain Freeway Project in Arizona.

On the other hand, orders in the Energy, Chemicals & Mining segment totaled $579 million. Also, Maintenance, Modification & Asset Integrity segment recorded awards totaling $404 million.

Consolidated backlog at the end of the quarter was $46 billion, up from $41.2 billion in the year-ago quarter. Out of this total backlog level, Stork contributed $1.5 billion. The upside in backlog levels came on the back of large awards won in infrastructure and government business lines.

Liquidity & Shares Repurchases

As of Mar 31, 2016, Fluor had cash and marketable securities (including non-current) of $2,017.5 million, down from $2,367.6 million as on Dec 31, 2015. Long-term debt rose to $1,572.0 million from $986.6 million as on Dec 31, 2015.

2016 Guidance

Compelled by the softness in the Energy, Chemicals and Mining segment, Fluor has slashed its full-year 2016 guidance. The company’s revenues are expected to take a beating on account of this formidable headwind leading to a downward revision in estimates. Currently, the company projects earnings per share for 2016 in the range of $3.25 to $3.65 (previous range: $3.50–$4.00 per share).

Our Take

Going forward, we believe Fluor’s solid track record of winning awards is a major positive that will drive revenues and margins. Also, the company’s strong backlog levels hint at bright days ahead especially for the government and infrastructure business lines. This apart, the company’s strong financial position, diligent restructuring initiatives and strong foothold in the U.S. engineering and construction sector are expected to boost growth.

However, on the flip side, softness in commodity prices coupled with a dismal outlook for the energy and mining markets pose threats that can significantly impede the company’s top-line growth. Meanwhile, increasing competition along with the inclination toward globalization has triggered a trend of consolidation across all industries, especially in the engineering and construction sector, which is a major concern for the company.

Fluor currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Gorman-Rupp Co. GRC, Luxfer Holdings PLC LXFR and AECOM ACM. While Gorman-Rupp and Luxfer Holdings sport a Zacks Rank #1 (Strong Buy), AECOM carries Zacks Rank #2 (Buy).

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