Fluor (FLR)

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Fluor Corp. (NYSE: FLR) builds and operates projects requiring substantial engineering know-how. The company builds everything from oil refineries to factories, highways, wind farms, and military bases - although its projects for oil and gas companies represent more than half of revenues.

For 2009, Fluor earned total revenues of $22.0 billion, compared to the previous year's revenues of $22.3 billion.^[1] Due to this decline in revenues, its net income declined as well, from $716 million in 2008 to $685 million in 2009.^[1]

Business Overview

Over the past several years, Fluor has benefited from the Oil & Gas segment increasing its levels of capital spending to support an increase in global demand for oil and gas. However, the global credit crisis and falling oil prices resulted in some project delays and cancellations in 2009 as some of Fluor's customers reassessed their capital spending plans. In addition, the capacity expansion in the North American refining market is nearing an end, further impacting the segment's ability to maintain its recent level of performance. Though the prospect of growth for the Industrial & Infrastructure and Government segments remains promising, the weak economy continues to affect the Global Services segment, with uncertainty over the timing of a broad-based recovery. The Power segment continues to be impacted by delays in obtaining air permits for coal-fired power plants and the lingering effects of the global credit crisis and recession.

Business Segments

Fluor breaks its operations into five broad segments: i) Oil and Gas, ii) Industrial & Infrastructure, iii) Government, iv) Global Services, and v) Power.

Oil & Gas (53.8% of 2009 Sales)^[2]

In this segment, Fluor offers design, engineering, procurement, construction and project management services to energy-related industries. Although growth in this segment was relatively flat between 2008 and 2009, this segment had been posting very rapid growth as many oil and gas companies increased their capital expenditures in order to meet growing demand for oil and gas. Fluor participates in the Mexican and Central American oil, gas, power and chemical markets through a joint venture with Group ICA known as ICA Fluor. This segment can be divided into the following sub-categories:

1. Upstream oil and gas production: In this sub-category, the increase in demand and price of oil and gas has led to an increased demand for Fluor's services in this segment. These services include the production, processing, and transporting of oil and gas resources, including the development of new fields and liquefied natural gas (LNG) projects.
2. Downstream refining focuses on modernizing and modifying Fluor's clients' existing refineries to satisfy environmental requirements, as well as developing new refineries worldwide. Fluor also plays an influential role in the domestic and international clean fuels markets, offering engineering and construction services to oil refineries to meet the stronger environmental policies being enacted by numerous nations worldwide.
3. Petrochemicals market mainly focuses on the expansion of ethylene and polysilicon production, for which Fluor mainly offers project management and procurement services. On the global scale, Middle Eastern markets play a particular importance for their supply of raw oil, and the Chinese market is significant for its strong need for the company's petrochemical products.

Industrial & Infrastructure (21.9% of 2009 Sales)^[3]

This segment, which posted total sales of $4.8 billion in 2009, provides engineering, procurement and construction services to industries such as transportation, mining, and telecommunications:

1. Transportation focuses on providing consulting, engineering, and design services for roads, highways, bridges, railways, and airports
2. Mining performs well when commodity prices and business, along with consumer demand, increase.
3. Life Sciences primarily consists of providing services in the pharmaceuticals and biotechnology industries, along with erecting new medical facilities and keeping existing facilities operating.
4. Telecommunications encompasses various designing, engineering, and construction services in the telecommunications industry, and gets most of its business from European markets.
5. Manufacturing offers manufacturing services to a variety of industries, and has recently seen growth in glass manufacturing.
6. Healthcare: A relative newcomer to the healthcare industry, Fluor is pursuing projects such as the construction for-profit and nonprofit healthcare centers and university medical centers.

Global Services (9.4% of 2009 Sales)^[4]

The Global Services segment, which posted total revenues of $2.1 billion in 2009, focuses on helping industrial clients improve the performance of their plants and facilities through services such as operations and maintenance activities, small capital project engineering, site equipment and tool services, and temporary staffing and supply chain solutions. Fluor uses a variety of subsidiaries to perform these services, such as:

1. Plant Performance Services LLC performs small capital engineering and construction, electrical, mechanical, turnaround, and demolition services.
2. American Equipment Company, Inc. (AMECO) provides construction services at plant sites of both third party clients and company clients throughout North and South America, South Africa, and the Middle East.
3. TRS Staffing Solutions, Inc. is a global enterprise of staffing specialists that provides both company and third party clients with recruiting and permanent placement services.

Power (5.9% of 2009 Sales)^[5]

This segment, which had total revenues of $1.3 billion in 2009, offers services in the gas fueled, solid fueled, renewables, nuclear, and plant betterment marketplaces. Fluor places particular attention to the coal-fired generation market, the gas fueled power market, and the nuclear power market.

Government (9.0% of 2009 Sales)^[6]

Fluor's Government Group, which posted total revenues of $1.98 billion in 2009, provides services to the United States government, focusing on the Department of Energy, the Department of Homeland Security, and the Department of Defense. Examples of these services include disaster relief and operations services to the military. In fact, the company obtained a great deal of revenue from its military services in Iraq. Fluor continues to pursue attractive domestic and international opportunities in this segment with the Department of Energy, the National Nuclear Security Administration, and the Nuclear Decommissioning Authority (United Kingdom).

Key Trends and Forces

Rising oil prices greatly benefit Fluor's business

With increasing domestic demand for oil, coupled with increasing international demand for energy in areas such as China and India, the price of oil and gas has increased significantly over the past decade.^[7] This benefits Fluor greatly, because oil and gas companies will be more eager and willing to spend money for drills, rigs, and other engineering intensive products that Fluor provides. This in turn raises Fluor's revenues.

Fluor's services depend heavily on the unpredictable cyclical demand of the markets it serves

Fluor depends on the economic well-being of the wide range of industries it serves, the majority of which are cyclical in nature. In particular, the oil and gas, mining, and petrochemical industries are cyclical and undergo fairly severe economic downturns from time to time.

Weak U.S. Dollar benefits Fluor's international sales

Because Fluor reports its revenues in U.S. dollars but does over half of its business internationally, it is affected by exchange rates. When the value of the dollar depreciates, Fluor's international sales grow in dollar terms, while also making Fluor's products and services cheaper for international customers.

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References

1. ↑ ^{1.0 1.1} FLR 10-K 2009 Item 6 Pg. 26
2. ↑ FLR 10-K 2009 Item 7 Pg. 31
3. ↑ FLR 10-K 2009 Item 7 Pg. 32
4. ↑ FLR 10-K 2009 Item 7 Pg. 35
5. ↑ FLR 10-K 2009 Item 7 Pg. 36
6. ↑ FLR 10-K 2009 Item 7 Pg. 34
7. ↑ The Economist: A large black cloud