Fluor Maps a New Road to Recovery : After Humbling Six Years, Firm Changes Focus, Expects Profit
When it was building its gleaming, fortress-like headquarters in 1976, Fluor Corp. added a front lawn the size of three football fields.
It was thought that the extra room would be needed for future expansion as the engineering and construction company charged into development of energy resources worldwide.
But just last month, the Fluor corporate flag over the Irvine complex was removed to reflect that the company now uses only about half of the 1.8 million square feet of custom-designed office space and sublets much of the rest to 18 other tenants. In fact, Fluor itself is just a tenant, having sold and leased back the complex to raise cash.
The past six years have been a learning and often humiliating experience for Fluor, which made mistakes in timing and expectations--including the colossal error of investing heavily in coal and metals when prices for those commodities were at their apex and about to plunge.
Those mistakes contributed to Fluor’s losses of $633.3 million in 1985 and $60.4 million last year. Since 1981, when Fluor posted record net income of $158.9 million, the company has seen its backlog of work tumble to $4 billion from $16 billion.
‘Permanently Different’
But after a two-year push to streamline, restructure and diversify, Fluor contends that it is on the road to recovery. And most industry analysts, while acknowledging that Fluor still has a number of costly problems to overcome, expect that the company will be back in the black in about a year.
Fluor executives say they are optimistic that the company is poised for a Phoenix-like resurgence, although as a bird of a different feather.
“We are going to be permanently different,” Chairman David S. Tappan Jr. says.
The company, which has diversified into a wide variety of non-energy engineering and construction projects--including automotive, food and diaper manufacturing plants--will never again rely so heavily on oil-, gas- and coal-related projects, he said. Since 1982, the share of Fluor’s engineering and construction workload represented by energy projects has dropped to 40% from 88%.
At the board’s request, Tappan--who turns 65 next Wednesday--has postponed plans to retire on his birthday until the corporate restructuring is completed-- at an unspecified date. Tappan would not say exactly when Fluor will start turning a profit again, but says: “I have never been more optimistic.”
Securities analysts who follow Fluor generally agree. Their estimates of the company’s results for the fiscal year ending Oct. 31 range from a $20-million profit to a $100-million loss, with the typical forecast being a loss of $40 million. For fiscal 1988, the estimates range from break-even to an $80-million profit, with the average a $40-million profit.
Much of that expected profit will result from severe cost cutting. Since 1981, Fluor has slashed its worldwide work force to 22,000 from 44,000 and sold $1.7 billion in assets, including $600 million worth of real estate, offshore drilling operations and oil and gas distribution companies.
Fluor even sold its 137-acre corporate headquarters for $340 million. The buyers--Trammell Crow Co. and First Winthrop Corp.--plan to use the undeveloped land at the site for other office buildings, restaurants, cinemas, shops and hotels.
And to build up cash for acquisitions and capital improvements, Fluor management for the first time suspended the quarterly cash dividend earlier this year. Despite these efforts, the two major debt-rating agencies in March cut Fluor’s long-term bond rating below investment grade.
Used to Stand Pat
In past downturns in the energy business, Fluor’s strategy has been to stand pat and wait for a recovery. In the meantime, the company’s engineers often took on a few non-energy projects.
“But as soon as the primary love bloomed again,” Tappan said, “(we) would abandon what we went into and go right back to building refineries, because that’s what (we) knew and liked. . . . If you said build a dog house, it would look like a refinery. That’s the way (we) were programmed.”
No more. Late last summer, most of Fluor Engineers, its engineering and construction subsidiary, was merged with Daniel International, a Greenville, S.C., construction subsidiary that Fluor bought in 1977.
Fluor Daniel, as it was renamed, was divided into five business sectors that Fluor is targeting in its strategy of diversification: government, process, general industrial, power plants and the traditional gas, oil and coal group. The purpose was to give managers in each area “responsibility for penetrating a given market,” Tappan said.
Since Nov. 1, Fluor Daniel has won seven contracts worth $650 million to design and build co-generation power plants, 20 contracts worth $62 million for work on food manufacturing plants, 21 contracts worth $110 million in aerospace, 15 contracts valued at $54 million to design and build biotech facilities and 20 contracts worth $65 million for government projects.
So broad is Fluor’s new business spectrum that it recently built diaper plants for Procter & Gamble and Kimberly Clark and is constructing a maximum-security penitentiary for the Texas Department of Corrections.
The company also entered the defense business last March with a $197.6-million contract from the Army to construct a facility at the White Sands, N.M., missile range to explore projection of laser beams. That work is part of the Reagan Administration’s Strategic Defense Initiative, or “Star Wars” project.
Meantime, John Simpson, president of Fluor Venture Group, said his 2-year-old subsidiary is helping to finance the formation of new enterprises, from a cellular telephone system for fishing fleets and oil rigs in the Gulf of Mexico to a waste-to-energy plant in Springfield, Mass.
The venture group, Simpson said, builds businesses that Fluor later can operate or sell at a profit. But more immediately, the new enterprises provide work for Fluor’s engineering and construction subsidiaries. “In a sense we are making our own work,” he said. One of those projects is a $469-million effort to convert a never-completed Michigan nuclear power plant into an electricity-generating facility that burns natural gas. The venture group is investing $25 million in that project.
The marriage of Fluor Engineers and Daniel International has also aided diversification. Daniel brought to the marriage its non-union orientation and a domestic business reputation. Fluor Engineers contributed its stronger design capabilities and contacts on the West Coast and abroad.
False Starts
Fluor Engineers and Daniel employees have been shifted around the country to match their skills with new business ventures. For instance, a Fluor office in Chicago that once engineered power projects is now headed by a former Daniel engineer and handles the design and construction of food, chemical and pharmaceutical processing plants.
Refocusing Fluor’s core engineering and construction business hasn’t been without false starts, however. The biggest mistakes were made by Fluor Constructors, the company’s engineering and construction branch. Last year, the subsidiary posted a $27-million loss because of cost overruns.
Tappan said Fluor Constructors stumbled when it tried to bid municipal water treatment projects at fixed prices in competition with smaller construction companies that have lower overhead and better knowledge of local markets.
And late last year, Fluor lost a $2.5-million contract to oversee the $310-million expansion of the Los Angeles Convention Center because its business interests in South Africa violated the city’s anti-apartheid selective purchasing ordinance. (Although Fluor has reduced its presence in South Africa, the city claims that its operations still violate the local ordinance.)
And then there is what Fluor executives call the “real estate problem.” In addition to selling its corporate headquarters in Irvine, Fluor sold a large office complex for $160 million in Sugar Land, Tex., about 15 miles west of Houston.
The cost of making lease payments to the new owners for space it no longer needs in both facilities is expected to cost Fluor $40 million in the current fiscal year. While Fluor expects to find tenants to sublet the 250,000 square feet of vacant space in Irvine by year-end, it has no prospects of using 600,000 square feet of vacant space in Sugar Land, where the office market has collapsed because of the oil industry slump.
Tappan remains convinced that another energy crisis is on the horizon and that demand for new refineries will return. Because of that expectation, Fluor is retaining employees with technical know-how in the field, he said.
“They are a liability today. They will be a tremendous asset tomorrow,” Tappan said.
Nonetheless, Fluor officials vow that this time Fluor will remain diversified--even after the market for refineries and other energy projects rebounds--to buffer the company against future economic jolts beyond its control.
Tom Samuelson, a securities analyst with the brokerage firm Duff & Phelps, said that while Fluor is one of the few companies in the world with the know-how and size to handle giant petrochemical projects, it faces much broader and stiffer competition in the other engineering and construction fields it is entering.
Not all major construction and engineering companies, however, have posted losses. A spokeswoman for Parsons Corp., a privately held Pasadena firm that once did mostly petrochemical and government work, said the company has enjoyed increased profits every year for more than a decade because it “diversified in a very timely fashion before the petrochemical crunch took hold.” Parsons does not publicly disclose its exact financial data.
While Fluor officials acknowledge their initially slow reaction to the oil downturn, they say their diversification efforts have moved into the fast lane.
Possible Successor
“We are a lot farther along than we thought we would be,” said Leslie G. McCraw Jr., president of Fluor Daniel.
McCraw, 51, who is also a Fluor director and has been mentioned as a possible successor to Tappan, added that besides entering new business sectors, Fluor has expanded its design and building services to cover the entire life of a project--from site selection through maintenance and refurbishment.
Meanwhile, Fluor continues to grapple with its Natural Resources Management Group--the last part of the company to be reorganized. The mining and minerals group has been an albatross around Fluor’s neck since soon after it bought St. Joe Minerals for $2.2 billion in 1981. “It will go down as one of the all-time bad acquisitions,” said Robert W. McCoy Jr., a securities analyst with Kidder, Peabody.
Tappan readily admits that Fluor’s mineral and mining businesses have proven to be “a heck of a lot less” of a good business mesh than Fluor management originally envisioned. The plan, he said, was that the minerals and engineering businesses would be counter-cyclical, giving Fluor a financial boost in engineering downturns. Mining also was meant to provide Fluor with a profitable place to invest the tremendous amount of cash that its engineering business was generating in the early 1980s, Tappan said.
Instead, both minerals and engineering went into tailspins.
In recent years, Tappan said, Fluor’s strategy for natural resources was to “make the best of tough times” by downsizing some operations, closing others and generally trying to “grind down costs.”
More recently, he said, Fluor’s natural resources group has started to benefit from rising market prices for gold and lead. The group overall is showing modest profits, and Tappan described the Massey Coal Co., in which Fluor has a 50% ownership interest, as Fluor’s “No. 1 cash machine.” In fiscal 1986, it generated $49 million in operating profit, Tappan said, largely on the strength of reduced costs.
Range of Options
An upturn in some minerals prices, Tappan said, gives Fluor “a whole range of options we didn’t have before” in deciding how to manage that sector, including the possibility of selling all or some of the minerals operations.
Tappan said Fluor management is studying which, if any, mineral operations it wants to retain. One distinct possibility, he said, would be the sale of the rest of St. Joe Gold, a publicly traded subsidiary that Fluor formed last year when it spun off 10% to public investors. “We are expanding gold operations and it could very well be . . . an excellent time to get out of the gold business,” he said.
Tappan also takes hope in the U.S. Commerce Department’s prediction of increased spending on plants and equipment by big companies in 1987.
But he does not make light of the final struggle that has capped his 36-year career at Fluor.
“I said when the last cycle started that I’d been around so damned long that I didn’t need a lot more experience,” Tappan said. “But (I said) it was going to be a very good experience for all these young guys who had never experienced adversity. I’m eating those words now. I’ve probably learned more in the last three or four years that I didn’t really want to learn, but I’ve learned.”
