CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign a rating of 'A-' to Fluor Corporation's (NYSE: FLR) planned issuance of approximately $500 million of 10-year senior unsecured notes. Proceeds will be available for general corporate purposes. The Rating Outlook is Stable. A full ratings list is shown below.
The new debt will result in a modest increase in Fluor's leverage which is currently at a low level. Total adjusted debt to operating EBITDAR was 1.9 times (x) at June 30, 2011, including the impact of lease expense. Fitch estimates adjusted debt to operating EBITDAR could increase to approximately 2.4x when including the new debt. Outstanding debt at June 30, 2011 was less than $50 million.
Fluor's ratings are supported by its well established position within the engineering and construction industry, a strong global presence, steady profitability, and project diversification. The company manages its working capital effectively which supports cash flow and liquidity across a global portfolio of projects. Fluor's equity base enables it to absorb project losses which can occasionally be large.
Fluor's performance is supported by its careful approach to bidding and executing contracts which helps to maintain adequate margins. Margins returned to normal levels in the first half of 2011 following significant charges in the last half of 2010 largely related to cost overruns on the Greater Gabbard wind farm project in the U.K. Margins in Fluor's backlog are generally favorable although competitive contract pricing remains a risk, and certain projects involve substantial pass-through work which reduces overall margins. The company's backlog reached a record level of $40 billion as of June 30, 2011. The increase reflects substantial new awards, much of which came from oil & gas and mining projects associated with growth in emerging regions and rising global demand for energy. New project activity in the power segment is low due to regulatory and economic concerns, but the segment could benefit from new projects related to alternative energy and modifications to existing power plants.
Free cash flow is typically strong although it was negatively affected by cost overruns in 2010. Fitch estimates free cash flow could improve from the relatively low level of $195 million in 2010 although working capital requirements related to new projects could potentially increase. This concern is offset by client advances which often fund a large portion of project working capital. Cash requirements include dividends and pension contributions. Fluor estimates pension contributions at $50 million - $70 million in 2011. The pension plan was more than 92% funded (underfunded by $49 million) at the end of 2010.
Fluor's cash deployment historically has been limited to project investments for equipment and working capital. Fitch does not expect acquisition spending to be material although large transactions are possible. The bulk of Fluor's discretionary spending has been used for share repurchases which became material in 2009. Repurchases totaled $359 million through the first half of 2011 and could continue under an existing share repurchase program which has approximately $200 million of capacity remaining. Fluor typically follows conservative financial policies and could reduce share repurchases in the event of further project write-offs or other cash requirements. Fitch expects Fluor to maintain a strong profile over the long term.
The potential for large project write-offs represents a material rating concern. Recognized claims against clients totaled $266 million at June 30, 2011. Most claims are typically collected, and write-offs in 2011 have been minimal. Fluor reported charges totaling $529 million in 2010 related to three projects, partly offset by tax benefits related to the losses. The largest charges related to the Greater Gabbard wind farm project which is now 85% complete. Fitch believes Fluor continues to have an effective risk management process, and future project losses will be controlled. The cash impact of project write-offs is reduced because a portion of the expenses to which the charges relate typically have already been incurred. Fluor's experience in managing disputes helps to mitigate the risk of write-offs and to control them when they occur. Other rating concerns include normal cyclicality in the engineering and construction industry.
Fluor maintains substantial liquidity which is available to meet working capital requirements. Liquidity represents a competitive strength that allows Fluor to undertake numerous projects simultaneously and absorb occasional losses. Near-term funding requirements can occasionally be large depending on the timing of collections and payments, the mix of projects, and the resolution of disputes. In July 2011, a verdict of $358 million was awarded against Fluor for claims that a lead smelter owned prior to 1994 was responsible for plaintiffs' health problems. Fitch believes the impact on Fluor's liquidity would be material but manageable. The impact would be mitigated by Fluor's large cash balances, possible indemnification claims by Fluor, and Fluor's intended appeal which could potentially reduce or eliminate the claim.
At June 30, 2011, liquidity included cash of $1.9 billion and nearly $300 million of short-term marketable securities. A substantial portion of these balances consisted of client advances or cash located overseas to support project work. Domestic cash totaled $600 million. In addition to cash, Fluor's liquidity includes availability under an $800 million revolving bank credit facility that matures in 2013. The facility can be used to back commercial paper. Fluor also has separate committed LC facilities totaling $1.7 billion. Total LC usage was $1.3 billion under committed and uncommitted facilities.
Fitch currently rates Fluor Corporation as follows:
--Long-term IDR at 'A-';
--Senior unsecured bank facilities at 'A-';
--Senior unsecured long term debt at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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