Engineering and procurement giant Fluor seemingly caught its peers in the nuclear contracting complex off-guard Tuesday in announcing it would not proceed with the sale of its government services business.
As recently as last week some managers within Fluor were still talking as if the sale was going forward, an executive with a rival Energy Department contractor said Thursday.
The Irving, Texas-based company announced the planned sale in September. However, belt-tightening over the past year, along with the anticipated sale later in 2020 of the AMECO business, are relieving Fluor of the need to divest government services, CEO Carlos Hernandez said during a quarterly earnings call with Wall Street analysts.
Last fall, Fluor expected to raise $1 billion and shore up its balance sheet by selling the federal contracting arm and other assets.
“As Fluor worked through the fourth quarter and realized some of the early benefits of its restructuring plan, the Company gained confidence in its solid liquidity position and its viable options for generating cash flow such that the Company no longer deemed it advisable or necessary to proceed with the sale of this business,” Hernandez said.
Fluor is selling off AMECO, a firm that rents heavy equipment to industrial customers, has slashed its dividend, and is growing more selective about what business it pursues. Counting its joint ventures,
Fluor’s government branch has roughly 28,000 employees and more than 40 projects, including DOE work in Idaho, South Carolina, New Mexico, and elsewhere. Management knows government contracting is a valuable business with good cash flow, Hernandez said, adding Fluor was approached by several viable buyers while the unit was on the market. Because it is a reliable cash producer, “we had very strong interest from many well-funded buyers,” he added.
The industry grapevine says Jacobs took a look at the Fluor’s government sector last year before the public announcement that it was going up for sale. Wall Street investment firms were also rumored to be likely suitors.
“We are excited about retaining this important and attractive asset,” Hernandez said. The sector provides steady business with long-term clients and cost-reimbursable contracts, he stated separately in the press release.
Then came the bad news: Fluor is not reporting final quarterly and 2019 yearly earnings numbers yet because it is under a Securities and Exchange Commission (SEC) investigation of its accounting and financial reporting for the second quarter of 2019, Hernandez said.
Because of the SEC probe, and an internal review, Fluor does not expect to file its annual report with the SEC by the end of February. “We do not believe at this time that we have material errors,” Fluor Executive Chairman Alan Boeckmann said during the call. But the books remain open, he added.
A spokesperson for SEC on Wednesday declined to comment on the investigation.
Whether in reaction to the SEC probe, the about-face on divesting the government contracting business, or something else, Fluor stock took a downturn after the Tuesday financial release.
The stock closed Tuesday at $14.79 per share, roughly 24% lower than its closing price on Feb. 14 of $19.54 per share. Wall Street was closed Monday in observance of Presidents Day. The stock dropped further on Wednesday to $14.06 at the close of trading before regaining some lost ground to $14.56 per share at the close of trading Thursday. Over the past year, Fluor stock has sold as high as $41.91 per share.
Fluor shares also dipped from about $21 to slightly more than $18 in late September, immediately after management announced plans to sell the government group. The announcement came about two months after Fluor suffered a $555 million loss in the second quarter of 2019.
Full-year new awards for the government segment were nearly halved, from $4.1 billion in 2018 to $2.2 billion in 2019.
Fluor-BWX Technologies has a $3.4 billion decontamination and decommissioning contract at the DOE Portsmouth Site in Ohio, which runs through March 2021. Fluor also leads Savannah River Nuclear Solutions, which has a $14.8 billion operations and maintenance contract at the Savannah River Site in South Carolina through September 2022.
In December, the Energy Department issued the potential 10-year, $10 billion award for Hanford Central Plateau Cleanup Contract in Washington state to a group comprised of Amentum, Fluor, and Atkins. However, a competing team has protested the award.
A Fluor team is also in the running for the multibillion-dollar agreement to manage radioactive tank waste at Hanford, the CEO said, adding the announcement could come in the next few weeks.
Fluor’s 2019 ending backlog is expected to be $3.8 billion, compared to $4.6 billion a year ago.
Hernandez said the sale of AMECO and other austerity measures – such as cutting the dividend to shareholders – improved the company’s financial health and preserved its investment grade rating.
A handful of industry sources this week expressed surprise at Fluor’s decision to call off the government contracting sale.
On Jan. 31, Los Angeles-based AECOM closed the $2.4 billion sale of its government contracting branch to affiliates of two New York investment firms. The new company is Amentum. “I fully expected that Fluor would follow suit,” one industry source said by phone.
“I was surprised because it seemed they [Fluor] needed the money,” said a second industry manager. He suspects the Fluor government branch will be better off remaining with its traditional parent. Had it been sold to a foreign-controlled entity it might run into trouble retaining its security-sensitive role as a subcontractor to the manager of the Alamos National Laboratory in New Mexico or its Navy nuclear propulsion contract with the U.S. Navy and the National Nuclear Security Administration, the source added.
While Hernandez says Fluor attracted a number of viable suitors for the government business, some industry sources questioned if prospective buyers’ offers were lower than management wanted.
Hernandez was elevated from Fluor chief legal officer to CEO in May 2019. He replaced David Seaton, after the company’s financial performance was judged below par.
