Fitch Affirms Fluor's IDR at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Fluor Corporation's (Fluor) long- and short-term Issuer Default Ratings (IDRs) at 'A-/F2'. The Rating Outlook is Stable. This action covers approximately $526 million of debt outstanding. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fluor's ratings are supported by the company's solid liquidity, historically positive free cash flows, conservative financial policies, strong backlog and diverse project portfolio. Fluor's liquidity and experience in its core engineering and construction markets mitigate the risk of large project losses. Fitch notes the overfunded status of Fluor's pension obligations and corresponding minimal cash funding requirements in the intermediate future.

Fluor's year over year revenues declined by approximately 25% during the first half of 2014 primarily driven by weakness in the mining and metals business of the Industrial and Infrastructure segment of the company. Despite revenue pressures, the company was able to achieve margin improvements attributable to various operating initiatives and a slight shift to higher volume of more profitable FEED and EPC projects in its Oil & Gas and Industrial and Infrastructure segments.

The continued weakness in the Industrial and Infrastructure segment is mitigated by strong backlog and heightened activity in the Oil & Gas segment. Fitch expects Fluor's revenues will increase for the remainder of 2014 and in 2015 driven by several large new awards in the company's Oil & Gas and Government segments. Fitch estimates Fluor's revenues will deteriorate by approximately 15% in 2014 with stable profit margins in the range of 5.2% - 5.6%.

Fluor's credit metrics could sustain modest deterioration without pressuring the current ratings. Company's adjusted debt to EBITDAR declined to 1.3x for the last 12 month (LTM) ended June 30, 2014, down from 1.8x from LTM ended June 30, 2013. Fitch expects Fluor's total adjusted debt to EBITDAR will remain near the current range although temporary modest increases are possible depending on project performance. Total adjusted debt includes off balance sheet liabilities, primarily lease expense.

Fluor generated approximately $545 million FCF during the last 12 months (LTM) ended June 30, 2014, up from approximately $427 million generated during LTM ended June 30, 2013. Fluor has consistently generated positive FCF, but its cash generation is lumpy and seasonal as the company typically generates lower operating cash during the first half of the year with occasional negative operating cash flow in the first or second quarter. The volatility of the operating cash flows is significantly impacted by working capital requirements which depend on terms and types of projects. In 2013, FLR generated $421 million FCF up from $245 million in 2012 driven by an increase in cash provided by operating activities. Fitch expects Fluor to generate above $400 Million FCF annually.

The company's annual operating cash flows should support a sustained level of capital expenditures in the $300 to $350 million range, a large portion of which is used to fund equipment purchases for Fluor's equipment leasing and execution services business (AMECO - Global Services segment); steady dividend payouts; and share repurchases. Fitch anticipates that Fluor will continue to follow disciplined financial policies to support its equity base and liquidity.

Rating concerns include significant working capital requirements, a sharp decline in the backlog and revenues of the Industrial and Infrastructure segment. Cost overruns and project disputes are a normal risk, but unusually large losses could potentially reduce Fluor's cash flow and liquidity. This concern is mitigated by a low percentage of fixed price contracts. The company's exposure to fixed price contracts comprises approximately 20% and its current backlog also reflects the historic mix of the cost plus and fixed price projects.

Fitch is also concerned by an outstanding verdict against Fluor in connection with a St. Joe Minerals lead case lawsuit. Fluor took an $85 million after-tax write off in the second quarter of 2014, however Fitch is concerned by the uncertainty surrounding additional $240 million in punitive damages originally awarded to plaintiffs but reversed and remitted to the trial court by the Missouri Court of Appeals in June 2014. This concern is not expected to affect Fluor's long-term performance, however may result in sizable cash outflow in the near- to medium-term.

Fluor's U.S. and foreign pension plans were overfunded by $22 million and $37 million at the end of 2013, respectively. Gross pension obligations totaled $687 million for the U.S. plans and $908.5 million for the foreign plans. The company did not make contributions in to domestic qualified pension plans and contributed $13 million to foreign qualified pension plans in 2013, down from $57 million contributed globally in 2012. Fluor expects to contribute approximately $30 million to $60 million in 2014, which is expected to be in excess of the minimum required contributions. Fluor contributed $12 million to its global pension plans in the first half of 2014.

At June 30, 2014, Fluor's liquidity comprised $2.3 billion of cash and marketable securities and substantial availability in $1.8 billion bank revolving credit facilities that mature in 2019. Even though a portion of the company's cash is associated with customer's advances, Fitch considers Fluor's liquidity adequate for the ratings. The company has a conservative debt structure, with no significant maturities scheduled before 2021.

RATING SENSITIVITIES

Fitch may consider a negative rating action if total adjusted debt to EBITDAR deteriorates and remains above approximately 1.75x which could occur in the event of contract cancelations, a significant downturn in the Oil and Gas sector, or large contract related losses. Additionally, a negative rating action may be considered if FFO adjusted leverage increases to approximately 2.0x or above for a prolonged period or the company's FCF margin falls consistently below approximately 1.5%.

The positive rating action is unlikely in the near term due to the company's cyclical construction market and the risk of large contract losses associated with potential cost overruns, contract disputes and litigation.

Fitch affirms Fluor's ratings as follows:

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--Bank facility at 'A-';

--Short-term IDR at 'F2';

--Commercial paper programs at 'F2'.

Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=847295

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA
Director
+1 212-908-0280
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Ause, CFA
Senior Director
+1 312-606-2302
or
Committee Chairperson
Craig Fraser
Managing Director
+1 212-908-0310
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA
Director
+1 212-908-0280
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Ause, CFA
Senior Director
+1 312-606-2302
or
Committee Chairperson
Craig Fraser
Managing Director
+1 212-908-0310
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com