Fluor’s Drive to Expand Takes a Quick U-Turn After Poor Returns

When James Stein briefed Fluor Corp. employees at the company’s Irvine headquarters earlier this month on plans to slash $100 million at one of the world’s biggest engineering and construction businesses, it didn’t take long before the issue of the company’s usually abundant executive bonuses came up.

In a message rarely heard at Fluor, Stein warned that those bonuses probably would be a lot smaller this year.

Fluor rewards its executives for performance, and performance has fallen considerably, at least by Fluor standards. Stein and other top executives have acknowledged that the company will not meet the financial goal that it sets each year--a 15% earnings increase.

The slowdown follows a three-year growth spurt that thrilled investors and employees alike as Fluor increased profit by 61% and increased sales by 41%.

That growth, though, was accompanied by soaring operating costs that have begun eating into profit, company executives say. Additionally, Fluor’s first-quarter profit was affected by cost overruns in two of its power plant projects.

The problems are centered in the company’s Fluor Daniel engineering and construction subsidiary, which last year accounted for 90% of Fluor’s $11 billion in annual sales but only 70% of its $268.1-million profit. Stein, who joined Fluor when it merged with Daniel International in 1977, was named president of the Fluor Daniel unit last month.

His downbeat message meshes with what stock analysts have been saying for more than a month as they bombarded the company with revised earnings estimates and downgraded stock recommendations that have put Fluor under more pressure from the investment community than it has seen in more than a decade.

On the defensive after shocking investors in mid-February with what for it were disappointing first-quarter earnings--an 8% increase to $62 million--Fluor has taken an abrupt U-turn from an expansion campaign that saw Fluor Daniel add scores of operating units and layers of management to run them.

This year, Stein told employees, Fluor will be closing and consolidating offices all over the world, laying off workers, thinning its management ranks and even abandoning the high-ceilinged, wood-paneled executive suites on the top four floors of its Irvine office tower as it moves to slash costs.

“We are going to be reallocating resources and focusing on areas with the highest growth and greatest amounts of bottom line,” he said.

Several of the more than two dozen new businesses Fluor has gotten into during the last three years “are really marginal in bringing a return,” Stein said.

Once concentrated on building oil refineries and power plants, Fluor has expanded into 30 operating units involved in everything from designing paper mills to cleaning up nuclear waste sites.

Each unit has its own management team, and all of that mid-management has added to the costs and complexity of doing business, Fluor Chairman Leslie McCraw said. When Stein is done with his cost-cutting program, Fluor still will be building automobile factories and pharmaceutical plants, but there probably will be only a few operating units and fewer than a dozen unit managers reporting to Stein.

So far, Stein has announced plans to reduce the size of the company’s Vietnam and Thailand offices; to close its 150-employee office in Dusseldorf, Germany, reassigning some workers and laying off others; to eliminate the three-person Tokyo office that costs $500,000 a year to maintain because of Japan’s tremendous real estate prices, and to downsize the company’s Chicago office and lay off 100 employees there.

Stein says there will not be massive layoffs in a company that has grown from about 11,000 salaried employees to 27,500 since 1983. But some departments reportedly are tossing around layoff figures of up to 10%, employees say.

Managers are so concerned about contributing their share of the cost-cutting that there reportedly are serious discussions going on over topics such as how many Christmas cards the company can afford to send out this year.

McCraw says he and his top executives will be taking details of the cost-cutting plan to investors and stock analysts around the country next week, along with this message: Despite the beating its stock has taken since its first-quarter earnings were released Feb. 18, Fluor is solid, under control and well on the way to securing its place among the top 25% of major U.S. corporations in 1998.

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The company’s future, though, has never been called into question. Most analysts say they realize that Fluor’s problems are temporary and believe the company can get back on track.

The question is how soon, says analyst Michael Dudas of UBS Securities in New York.

“They need to give investors a detailed plan, a sense of where they are going,” Dudas said.

Until that happens--and Fluor says it will start thawing its freeze on information next week--the company remains under attack. Its stock price, which hit a record high of $75 a share on the New York Stock Exchange the day it released its first-quarter earnings, closed Tuesday at $54.375--representing a drop in Fluor’s market capitalization of almost $2 billion in nine weeks.

Its retrenchment is seen by some as a defeat for McCraw, the architect of Fluor’s recent expansion drive. Indeed, some industry analysts are suggesting that it is an admission that top management lost control for a while and that Fluor’s is a cautionary tale of the dangers of growth for growth’s sake.

“The company uses the analogy of the gardener who plants 100 flowers so that while some will die, others will bloom,” says John McGinty, who follows Fluor for the Credit Suisse First Boston brokerage. “But not enough of them bloomed. Clearly, they went too fast.”

Top Fluor executives bristle at the suggestion that they might have lost control of things, but what McCraw calls a bit of “fine tuning” clearly is an effort to tighten the reins.

“We had great success accomplishing our objectives” to increase the company’s size and scope, says James Rollans, Fluor’s chief administrative officer and a 15-year veteran of the company. “The rub is the cost associated with having a lot of things going on.”

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Floundering Fluor

Fluor Corp.’s stock has taken a beating since reaching its 1997 high in February. Weekly closes on the NYSE since December 1996 and latest:

Tuesday: $54.375, up $1

Source: Bloomberg News