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Text: There is an inherent risk that actual results and experience could differ materially.
You can find a discussion of our risk factors, which could potentially contribute to such differences in our 2020 10-K and in our Form 10-Q, which was filed earlier today.
Bob was the great grandson of our founder and worked at Fluor for 42 years before retiring in 2009.
For 27 years, he led the Fluor Foundation, our charitable and community involvement organization that was established by his father and his uncle Si Fluor in 1952.
Throughout his career, Bob brought meaning and value to the active giving back, inspiring thousands of employees across the company and across the globe, to commit time and resources to bettering their communities.
The company will continue to build on Bob's legacy of supporting stronger, more sustainable communities around the world.
In a few minutes, Joe will walk through the financials of our business in each of our segments.
So let me first provide a high-level overview of what we are seeing in each of our major end markets.
Starting with Urban Solutions.
In mining, work is tracking broadly to our expectations for the next 18 months.
We have seen a few large projects shift to the right as detailed estimate reviews and scrutiny of projects by our clients prior to an investment decision being taken is higher than we have seen in quite some time.
In addition to those projects, we have a steady slate of feed and limited notice to proceed work, where we have a high level of confidence in conversion to full project awards in the next couple of years.
Our prospect list is incredibly diverse, and we are not dependent on any one region or any one commodity to see significant growth in this business.
Backlog for mining declined by approximately $1 billion in the quarter.
That was due to the cancellation of a steel project in North America.
Moving to Infrastructure on slide four.
The bipartisan bill continues to gain momentum, and we are optimistic that it will focus on more traditional infrastructure projects, including roads and bridges, which we believe will provide some upside to Fluor and more importantly, funding certainty to our clients in the coming years.
Importantly, we are starting to see shifts in contract structures and collaborative models are being applied to the infrastructure sector as well as other sectors that allow contractors to compete on capabilities and qualifications instead of solely on price.
This is a positive development, and we are encouraged by this approach to risk mitigation.
On a particularly promising note, we are seeing advisory institutions acknowledging the challenges encountered in executing public works projects.
This has led to the development of more collaborative procurement models to support their public sector clients.
Last week, we were notified by TxDOT that our co-lead joint venture was selected to design, construct and maintain the 6.5-mile long I-35E Phase two project here in Dallas.
Our portion of the work will be booked in the third quarter.
We're excited about this project and look forward to supporting TxDOT on this and other capital programs in the future.
Regarding our legacy infrastructure portfolio, I want to provide an update on the Gordie Howe Bridge Project and the $138 million charge we announced today.
The project is experiencing significant COVID-related delays as well as overruns due to procurement and subcontractor cost growth.
This charge includes additional reserves for delays and disruptions in the schedule.
Fluor is not the lead operating partner on this contract.
It's important to note that these cost growth factors may be at least partially recoverable under the contract.
We expect that it will require several quarters to analyze recoverability and negotiate with our clients before the accounting standards allow us to recognize incremental revenue for these amounts.
While we are disappointed in the performance of the project, we believe we have a solid estimate on the cost at this point.
Design is essentially complete, and we have procured approximately 85% of the materials required.
We have been revising the forecast along the way, and this contract was previously included in our 0 margin projects in backlog.
As a noncontrolling partner in this JV, we continue to work with our partners to help them get this project into the best possible position.
We have just under $1 billion in backlog remaining for this project and anticipate substantial completion by the end of 2024.
Our other infrastructure projects continue to make solid progress, including the LAX people mover, which crossed a significant milestone in early July when the joint venture placed the first forward trusses for the elevated pedestrian walkway.
Turning to slide five.
In advanced technologies and life sciences, we are successfully wrapping up some of our large data center projects in Europe.
We also see opportunities for semiconductor manufacturing facilities, both domestically and internationally.
These projects are a mix of brownfield and greenfield, and provide a lot of opportunity for add-on work as these facilities grow.
In life sciences, we continue to see a good list of opportunities, as our world-class technology capabilities support our strategy of getting front-end work.
We have been awarded a few front-end projects this quarter with the goal of converting them into EPCM contracts.
Overall, we still see the ATLS end markets as an area for growth in our business, and we are focused on deploying our teams on to projects where we can grow our market share with contract terms and conditions that we find favorable.
In Mission Solutions, we experienced strong margins this quarter due to increased execution activity on DOE projects, higher-than-forecasted performance-based fees and the release of COVID-19 cost reserves.
This strong performance was somewhat offset by a decline in execution activity on army logistics and life support programs in Afghanistan and Africa.
In June, we fully demobilized our people and successfully completed our assignment in Afghanistan after 13 years.
At its peak, Fluor had 26,000 employees from 65 countries, speaking 39 languages at 76 sites and supporting over 100,000 troops.
This included 191,000 meals prepared per day and the establishment of the first-ever biodiesel program for the U.S. military deployed overseas.
Under this program, we produced over 0.5 million gallons of fuels for the bases.
We are now continuing to support the Army through our LOGCAP V task order award in Africa.
Next, please note that on the RAPID project, we have moved into the warranty period.
This project is now essentially complete.
Our major pursuits for the second half of this year in this group include the Savannah River Management & Operations contract extension and the Y12/Pantex Management & Operations contract in Tennessee and Texas.
Moving to Energy Solutions on slide seven.
We had a particularly strong quarter due to certain favorable events driving up our gross margin.
This reflects the negotiations of change orders, scope increases and cost improvements across numerous projects.
Furthermore, margins also benefited from the release of credit loss reserves after we received payment on a significant long-standing past due receivable.
These positive segment margin results were partially offset by a $20 million loss recognized on an embedded derivative, which is excluded from our adjusted earnings per share numbers.
Turning to slide eight.
We remain pleased with the progress on our LNG Canada project in Kitimat.
During the quarter, we saw a significant easing of public health orders that had slowed progress earlier this year, and we are now fully staffed onsite per our plan.
In the second quarter, we achieved several major milestones.
First, we drove the last of the Phase one plant piles.
This program started in January 2020 and included the installation of nearly 6,500 piles.
If laid end to end, the piles would extend 130 miles.
Secondly, the project's material offloading facility is now operational, receiving and unloading the first three major pieces of process equipment shipped via oceangoing vessel.
These pieces of equipment for Train one include the 345 ton, 50-meter-long main cryogenic heat exchanger and two precooler units, each weighing over 280 tons.
We are scheduled to direct these pieces this fall.
The site has gone vertical with the steel erection of the non-process building, including the central control and administration buildings.
During the quarter, we completed the LNG storage tank wall pours.
The LNG tank group and suspended deck raising is scheduled for next week.
Module fabrication has commenced for all facets of the project across the Asia and European module fabrication centers.
Preparation and planning have commenced for the first module delivery major, which are on target for Q4 2021.
We have formalized the term sheet with our client, which outlines principles of cost and schedule relief related to delays, including COVID, engineering and procurement impacts through February 26, 2021.
We are targeting finalization of a formal variation this month.
We continue to enhance our Energy Transition portfolio and believe that Fluor will be a vital contributor to a lower carbon future.
We are seeing success in several markets, such as renewable fuels, carbon capture, clean hydrogen, battery chemicals and asset decarbonization.
First, in the renewables fuel market, Fluor is focused on brownfield or revamp capabilities with a geographic focus in North America, where low carbon fuel standard credits are available, demand for liquid fuels continue and feedstock selection is broadly based.
Next, in the carbon capture market.
Fluor can perform projects with any technology globally.
This includes our own proprietary technology for both pre-combustion and post-combustion, Fluor Solvent and Econamine FG+, respectively.
We are also seeing further opportunities for carbon capture on new and existing LNG facilities.
Our clean hydrogen efforts include both green hydrogen and blue hydrogen.
Fluor is relying on its 50 years at the forefront of the gasification industry and has executed more than 30 pre-FEED and FEED projects.
Fluor can differentiate in this market with our ability to act as integrator and OSBL contractor.
Another Energy Transition market we are exploring is battery chemicals.
We are expanding our lithium capabilities and are pursuing the growing market of electric vehicle battery production.
In asset decarbonization, Fluor is leveraging our design experience for refineries and petrochemical facilities, including steam and electrical systems.
We have global execution capabilities for conceptual front-end design through EPC for both electrification and energy efficiency projects.
Aside from these markets, we are also pursuing projects in green ammonia, chemical recycling, bio-based chemicals, long duration energy storage, waste-to-energy conversion and bio LNG.
Most of our energy transition work is in the United States and Europe.
And based on our differentiated technical position, we continue to view growth in this area as a driver for increased revenue and earnings in the coming years.
Now let's turn to NuScale, a related energy transition offering on slide 10.
For the first seven months of this year, NuScale has received $192 million in outside investments from JGC and GS Energy, Doosan, Samsung and IHI, among others.
These infusions not only eliminate the need for Fluor to provide additional funding, but also accelerate NuScale's path to commercialization and demonstrates third-party investor interest in NuScale's business prospects.
Additionally, we continue to have positive and productive conversations around nuclear power as a necessary baseload clean energy source, both in North America and abroad.
We believe that our new scale product will become a vital part of a cleaner energy future.
Before handing the call over to Joe, on slide 11, I want to share a few observations as we head into the second half of the year.
First, we expect to see some inconsistency or lumpiness in new awards as the optimism in post-pandemic capital spending from clients is partially offset by concerns about cost growth for labor and materials.
We're also keeping a close eye on the impacts of the Delta variant of COVID as it relates to our exposure to global supply chains.
While these dynamics may shift certain projects out in time somewhat and impact the near term, there are longer-term trends in our business that I view as very positive.
First, as mentioned in my infrastructure remarks, we are starting to see a better balance of risks sharing in contract structures.
Projects are increasingly structured as predevelopment agreements where clients and contractors work together to identify and mitigate risks before bids are finalized.
These collaborative models are being considered because clients are seeing contractors declining to bid on large projects as terms and conditions have shifted risk allocation too far away from the owner.
Also, we continue to see a robust pipeline of study, pre-FEED and FEED work to support future growth.
We are currently working on or have recently completed pre-EPC work that represents over $150 billion in total installed costs.
Additionally, we are pursuing another 200 study in FEED projects, representing almost $200 billion in TIC over the next several years.
So while we are seeing some near-term headwinds in 2021 with new word lumpiness, we have considerable opportunity to capture projects that are in the pipeline, and they're well suited for Fluor.
Finally, regarding our cost savings initiative, we are making solid progress and have identified significant opportunities to improve processes and reduce costs and create an organization that is competitive and fit for growth.
Our various work streams are taking specific actions to ensure that our resources are tailored to what we need today.
And we are establishing new protocols so we can efficiently scale as our markets ebb and flow.
For the second quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.32.
Our diluted share count was $156 million for the quarter, up from $140 million in the first quarter.
This includes the additional shares from the convertible preferred offering we completed in May.
In the third quarter, we expect our diluted share count to be approximately $170 million, as the effects of the issuance will be for a full quarter.
For the quarter and the year-to-date, the offering is anti-dilutive under GAAP due to the net loss.
So common earnings per share and diluted earnings per share results are the same.
However, in terms of guidance and results, we will discuss EPS, including the aforementioned adjustments as well as using the larger diluted share count going forward for comparison purposes.
Our financial statements will continue to conform to GAAP, and we will provide the required reconciliation.
But we will use the larger dilutive share count for all periods as appropriate.
I will walk you through that a little more clearly when we talk about guidance.
Turning to slide 13.
Specific to our convertible preferred offering, we saw it as a necessary and positive step toward reinforcing financial discipline for the company.
This offering allowed us to make a significant change in our net debt profile and not have to wait for proceeds from outstanding transactions that do not have an established closing date.
With the expected debt retirement, our debt to total capitalization ratio will decline to below 40% by year-end, fulfilling the goal that we set on Strategy Day.
The positive feedback we've received from the credit rating agencies and the credit provider shows that they are supportive of our efforts to drive Fluor to its historical leverage profile.
This ensures we have the capital strength to maintain our position to bid and win the projects to support the growth within our stated strategy.
Since completing the offer, we have retired $26 million in debt, to date, and anticipate additional substantial retirements by the end of 2021.
Our overall segment profit for the quarter was $67 million or 2.1%, and included the $20 million charge for embedded derivatives in Energy Solutions and quarterly new scale expenses of $19 million.
Excluding these expenses and the effect of the embedded derivative, improves our total segment profit margin to 3.3%, in line with our guidance for the year.
Our ending cash balance was $2.7 billion, and includes the unutilized proceeds from the convertible offering and the completion of a P3 sale in North America.
Cash flow from operations was $77 million for the quarter, and we expect cash flow generation to be positive for the second half of this year.
Operating cash flow improved from the first quarter due to decreased funding for COVID costs on projects, lower cash requirements for G&A and tax payments as well as a decline in working capital.
We also completed the sale of AMECO North America in the second quarter and received cash proceeds of $71 million.
We have shifted our focus to the divestiture of AMECO South America and Stork and have confidence we will transact these divestitures prior to Q1 of 2022.
We continue to consider small M&A opportunities, as previously discussed.
But given current valuations in the market, we remain extremely selective.
Our G&A expense was $31 million compared to $66 million last quarter.
The decrease is due to the impact of stock price on our incentive compensation in the second quarter.
Before I provide details about our outlook for the balance of the year, I want to provide a bit of insight into our current portfolio.
At the end of the quarter, our backlog contained $1.2 billion in projects that are in a 0 margin or loss position.
Outside of the Gordie Howe project, we have just over $200 million in backlog remaining for projects in a loss position, virtually all of which will complete by the end of 2022.
All new awards since we tightened our bidding criteria, two years ago, remained profitable.
Furthermore, looking at this slate of more recently awarded projects, project gross margin in all three segments is about 40 basis points higher than as sold gross margin, which shows there more disciplined approach to bidding is resulting in more predictable and profitable results.
Our previous adjusted earnings per share guidance of $0.50 to $0.80 per share was based on a share count of 140 million shares and thus, implied net income of $71 million to $113 million for 2021.
Based on the performance we see in the businesses and considering the additional shares related to the convertible preferred offering, we are raising our adjusted earnings per share guidance to a range of $0.60 to $0.80, which correlates to an adjusted net income of $94 million to $128 million for the full year.
Hitting this target is dependent on many of the currently identified projects being awarded in a timely fashion and our ability to convert them into revenue in the next two quarters.
As David mentioned, some projects may be delayed by owners until there is more certainty regarding near-term concerns around cost growth for labor and materials.
We continue to monitor these headwinds through our supply chain group and we are making sure the team remains aligned with our bidding process.
Despite the anti-dilutive nature of the offering at this time, we will continue to report adjusted EPS, assuming a fully diluted share count for measurability and will provide reconciliations as necessary.
We are also adjusting our segment level guidance for the second half of the year and expect segment margins to be approximately 3% to 4% in Energy Solutions, which excludes any fluctuation from the embedded foreign currency derivative, 3% to 4% in Urban Solutions, and 2.5% to 3% in Mission Solutions.
These margins also underpin Q3 and Q4 performance to support the updated diluted and adjusted earnings per share range of $0.60 to $0.80.
On our Strategy Day in January, we provided long-term 2024 earnings per share guidance of $3 to $3.50.
This range was provided using our 2020 share count of 140 million shares.
Adjusting for a diluted share count of 170 million shares in 2024, we are updating our long-term earnings per share guidance to a range of $2.50 to $2.90.
To reinforce, we are not changing our income assumptions, just adding to the denominator.
Operator, we are now ready for our first question.

user
compname posts sees fy adjusted earnings per share $0.60 to $0.80.
sees fy adjusted earnings per share $0.60 to $0.80.
fy adjusted earnings per share guidance excludes nuscale-related expenses and other adjustments.
for second half of 2021, we see some headwinds and inconsistency in new awards.

assistant