Fluor Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A global engineering and construction firm providing services across various industries, particularly in energy, infrastructure, and mining.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Fluor Corporation (FLR) is a global engineering, procurement, and construction (EPC) company. It provides a range of services, including project management, engineering, procurement, fabrication, construction, maintenance, and modularization, across diverse sectors such as:

  • Energy Solutions: Covers oil and gas exploration, production, and processing, as well as facilities for renewable energy, including biofuels, hydrogen, nuclear power and other clean energy technologies.

  • Urban Solutions: Focuses on projects within infrastructure, transportation, manufacturing, and life science facilities, among others.

  • Mission Solutions: Primarily serves the U.S. federal government and other governments globally, providing engineering and project management services for nuclear, civil, and environmental remediation and defense projects.

  • Other: Includes operations not specific to other business segments and represents a small part of their operations.

Competitive Landscape:

The company operates in highly competitive markets with significant competition based on:

  • Price: A major factor for project selection, particularly in industries like infrastructure.
  • Technical capabilities: Specialized engineering and construction expertise.
  • Global coverage: Ability to manage and complete projects worldwide.
  • Client relationships: Established track record and customer intimacy.

FLR faces competition from large global firms and smaller specialized players, requiring it to demonstrate specific advantages in each project pursuit.

What Sets Fluor Apart?

  • Global Expertise: Large scale capabilities for handling complex large-scale projects across the globe. * Long-Term Relationships: A strong focus on establishing and maintaining long-term client relationships.
  • Strong engineering background: Core competency that sets them apart in many projects
  • Diversified Portfolio: Wide array of industries they have experience in, and therefore can mitigate the risk of reliance on single industry

Moat Analysis:

Rating: 2 / 5 - Narrow Moat

Fluor’s economic moat is narrow, largely stemming from high switching costs, established client relationships, and scale:

  • Switching Costs: Their long project durations with repeat business mean customers are less likely to switch providers, particularly on large infrastructure projects that require familiarity with project procedures
  • Scale Economies: The company’s size allows it to manage complex projects more efficiently. However, there are no significant cost advantages as other competitors also possess similar scale.
  • Reputational Advantages: Their long track record of delivering on complex projects also serves as an advantage, making them a preferred company to work for with long-term clients.

However, these advantages are not insurmountable. The engineering and construction industry is intensely competitive, and contracts are won or lost based on price as well as technical capabilities. Therefore, a stronger moat is hard to develop

Risks to the Moat and Business Resilience:

  • Commodity and Labor Price Inflation: In the current inflationary environments, costs for materials and labor can be volatile and could result in increased prices, hurting profit margins, as projects might already be contracted at lower levels.

  • Economic Slowdown: A global economic slowdown would result in a reduction in investment in big infrastructure and energy-related projects, which may lead to lower profits for the company.

  • Competitor Pressure: Price-based bidding can erode margins for them as they try to compete aggressively. Competitors can gain advantages in cost and time-effective delivery

  • Project-Specific Risk: Issues in the supply chain, cost of materials, workforce, or execution can affect a particular project. While their business is designed to have numerous projects, thereby reducing risk from any single one, any substantial risk would still be an issue.

  • Cybersecurity: The use of IT infrastructure could be vulnerable to cyber security breaches or other risks, that can lead to decreased client confidence. In addition, failure to maintain proper security controls could hurt operations.

  • Regulation and Compliance Risks: The company could face challenges in the future due to new regulations. The regulations can come from environmental and safety regulations for large projects and their construction, to local state taxes or the US Federal laws.

  • Loss of Major Clients: Failure to meet expectations of major clients can lead to them selecting competitors for the projects. Loss of any large client or a partnership can materially affect results.
    • Acquisition risks: Integration risks include cost overruns, delays in anticipated synergies, or misidentification of value.
  • Geopolitical Instability: Geopolitical events and international regulations in the regions in which FLR operates, might affect operations and financials.

Financial Analysis:

FLR’s financials are complex and require careful analysis:

  • Revenues: The company had an operating revenue of $16,110 million in 2023. A significant portion comes from its energy solutions segment, which had about $11.65 million in revenue, indicating the importance of this market segment.
    • Energy solutions provides design, engineering, and construction services for the oil and gas industry. It also includes renewable and sustainable sources, and other energy related projects.
    • Urban solutions focuses on infrastructure, life sciences, and advanced manufacturing.

  • Mission solutions serves the US government, and other governments worldwide, primarily delivering project and construction support for military and civil projects.

  • Profitability: They have a long history of profitability, however, have had issues with consistency in recent times.
    • Operating profit was reported at $319 million in 2023 and their operating margin is around 2 percent, which is relatively low. The increase in operating expenses and cost of revenue are the primary driver of low margin.
    • They reported a net loss of $205 in 2023.
  • Cost Management: Costs are divided into SG&A, cost of revenue and interest expenses. All of which are essential aspects that affect profitability.
    • The largest expense is cost of revenue, which was $14,473 million.
    • Operating costs and selling, general, and administrative costs (SG&A) has also increased.
  • Balance Sheet:
    • Total assets were reported at $6.59 billion, with a mix of current and non current assets. Cash and cash equivalent was reported as approximately $2.4 billion.
    • Total liability was 7.2 billion, where they seem to have large amount of contract liabilities, indicating prepayments for projects. Debt was around 2.7 billion.
  • Cash Flow: A large amount of cash flow is dedicated to acquisitions and capital expenditures in recent times. Cash from operations has been inconsistent as it is affected by the overall state of the projects.
    • Operating cash flow was -$129 million and investing cash flow was $-268 million, but financing cash flow was $139 million, indicating that they have borrowed money.

Recent Concerns

  1. Project Delays and Write-Downs: In their 2023 annual report, they have cited several major problems with a few projects that had a significant financial impact on the company. The issues that led to these problems included issues with supply chain, design, cost overruns, and labor.

  2. Guidance Revision: During Q3 2023, guidance for the year was lowered to $20-$25 billion from the initial $23-27 billion range due to underperforming businesses. * Also the EPS forecast was cut to $1.15-$1.35 from the original $1.70-$2.00 range.
  3. Increased Borrowings: The company’s recent cash flow statement shows they are relying more on debt. With an increase in interest rates, this is a dangerous trend.
  4. Ongoing Litigation: The company is involved in ongoing litigation proceedings related to several contracts. Any liabilities from such can have a substantial impact on the company.

Understandability: Rating: 4 / 5

While some parts of Fluor’s business might be easily understood, the intricacies of the business and its complex projects makes it somewhat complicated. Therefore, the understandability of the company is 4/5.

Balance Sheet Health Rating: 3 / 5 Fluor has a fairly complex balance sheet, mainly due to the large value of their contracts and their liability. Their balance sheet has been hit hard by the current economic state of the world and other factors. The company has a moderate debt level, but it can become dangerous if their projects continue to struggle. Therefore, a rating of 3/5 is given.