Entering text into the input field will update the search result below

Fluor: Why Turnaround Is Difficult Despite Experienced New Management Team

Mar. 02, 2020 10:57 AM ETFluor Corporation (FLR)GVA, MDRIQ15 Comments
GS Analytics profile picture
GS Analytics
2.4K Followers

Summary

  • Fluor is under SEC investigation after taking huge charges in Q2 last year.
  • The company's problems do not arise from its execution capabilities but unrealistic estimates while bidding for projects under its previous management.
  • Until there is more clarity on future charges, I remain on sidelines.

Fluor's (NYSE:FLR) stock price has corrected ~50% over the last couple of weeks after it announced an SEC investigation into the company's accounting and financial reporting. The hefty $714 mn in pre-tax charges which Fluor took in the second quarter of 2019 has attracted SEC's attention. Fluor is not the only E&C company which has taken significant charges in the recent past. Recently bankrupt McDermott (OTCPK:MDRIQ) took $485 mn in charges in the first nine months of 2019 before filing Chapter 11. Granite Construction (GVA) also reported significant negative revisions in its project profitability estimates last year (see my article on Granite here).

In order to understand what is causing these charges, one should understand the percentage-of-completion accounting method these companies are using. Fluor and most of the other E&C companies recognize revenue using the percentage-of-completion method, based primarily on contract cost incurred to date compared to total estimated contract cost. The percentage-of-completion method of revenue recognition requires the company to prepare estimates of the cost to complete for contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule and the cost of materials, labor cost and productivity, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards.

In addition to risks and resulting variance due to project delays, cost overruns or other problems, there is also risk from overly optimistic assumptions particularly on lump-sum or fixed-price contracts. Sometimes, in order to secure a project, a contractor like Fluor may come up with an unreasonably low bid. This is particularly true if there is intense competition and the end market is not seeing much project activity. Those incorrect assumptions then find their way to the company's P&L while using the percentage-of-completion method. At the end of the project, when it becomes apparent that the actual

This article was written by

GS Analytics profile picture
2.4K Followers
We primarily focus on GARP (Growth at reasonable Price) opportunities in industrial, consumer, and technology sectors. Please click the "Follow" button to receive our latest research. If you have any questions, feel free to reach out to us through the comments section of our articles or SA messaging functionality.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.