Fluor Earnings: Full-Year Outlook Maintained Despite Charges on Legacy Projects

We are maintaining our $33 fair value estimate for no-moat Fluor FLR after the engineering & construction firm reported mixed first-quarter results. While revenue was up 20% from the prior-year period, Fluor posted a $107 million net loss driven by $80 million in charges on two legacy projects as well as a $60 million negative earnings impact from the sale of Ameco South America. Management expects full-year cash flow to be modestly positive, even with around $200 million for legacy project cash needs.

Despite challenges on the legacy projects, management reaffirmed its 2023 and 2026 guidance. Fluor continues to anticipate full-year 2023 revenue growth of roughly 10%, adjusted EBITDA of $450 million-$600 million, and adjusted EPS of $1.50-$1.90. The outlook bakes in segment margins of around 5.5% in energy solutions, 3% in urban solutions, and 3.5% in mission solutions.

First-quarter new awards were $3.2 billion, up from $1.9 billion in the same period last year, and Fluor ended the quarter with a $25.6 billion backlog, up nearly 33% year over year. Furthermore, the prospect pipeline remains healthy, as management said on the earnings call that Fluor has recently completed or is currently working on front-end engineering and design and study packages totaling around $290 billion. We were encouraged that 81% of the new awards in the first quarter were reimbursable.

While the continued losses on legacy projects have been frustrating, we expect the firm’s portfolio transformation to lead to more stable results in the future. Fluor has already reduced its fixed-price exposure from 59% at the end of 2021 to 36% at the end of March 2023, and management is targeting a further reduction in the fixed-price exposure to 25% by 2024. We expect the move away from fixed-price contracts to result in a lower risk.