A Revamping Fluor’s Annual Profit Down 45%

Fluor Corp., which last month said its fiscal 1997 performance would be disappointing, kept its word Wednesday and reported that profit for the year fell substantially despite an 11.5% gain in the fourth quarter.

The giant engineering and construction services firm reported that profit for the year fell 45% to $146.2 million, or $1.73 per share, from $268.1 million, or $3.17 a share, for the previous year.

Company officials also repeated warnings that they expect profits to remain depressed in 1998--in the range of $225 million to $250 million--as Fluor continues a restructuring that began early this year.

Despite the sharp drop in 1997 profit, revenue for the fiscal year ended Oct. 31 rose 30% to $14.3 billion from $11 billion. The boost came largely from increased cash flow from existing multiyear contracts.

Fluor’s stock fell $1.50 to $36.44 a share in moderate New York Stock Exchange trading Wednesday. The stock had slumped nearly 10% on Nov. 3, after company officials said the annual results would fall below analysts’ published expectations.

Fluor’s fourth-quarter profit rose to $88 million, or $1.04 a share, from $78.9 million, or 93 cents a share, a year earlier. But the hike was largely the result of a massive cost-cutting effort and a steep paring of the sums set aside for executives’ performance bonuses.

Revenue for the quarter was up 21% to $4 billion from $3.3 billion.

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Although Irvine-based Fluor has met its earlier goal of slashing $100 million from operating costs, officials said in recent interviews that even deeper cuts are needed to improve what Chairman Leslie McCraw calls “unacceptable” profits.

Fluor “had some problem projects to work on, and overall they have done a pretty good job cleaning up,” said Robert Toomey, an industry analyst with the Piper Jaffray Inc. brokerage in Minneapolis.

“The underlying demand for what they do remains very good. . . . The issue going forward is that Fluor’s cost structure still seems to be too high,” he said. “It is going to take some pretty aggressive action over next six to 12 months to bring it into line.”

There is no big new cost cutting plan in place, however. Instead, Fluor officials are sticking with a cost-cutting and reorganizing strategy outlined previously.

The company also denied a report that it wants to sell major assets, including its increasingly important equipment and personnel leasing business and its profitable A.T. Massey Coal Co. subsidiary.

“We are not soliciting offers and we have no plan to sell any of our businesses,” said James Rollans, senior vice president and chief administrative officer.

Rollans said the company is continuing a restructuring put into place after it shocked investors and analysts earlier this year by announcing that its three-year expansion effort had gone awry and that costs had gotten out of hand.

The company took a $140-million write-off in its second quarter, related to losses on several major projects.

Since then, 100 executives--including four senior managers--and about 800 salaried employees have left. Fluor has closed or substantially reduced operations at several offices and has sold its Acquion electronic purchasing subsidiary.

Because it picked up $2.5 billion in new contracts during the year, Fluor’s total salaried payroll of 30,301 is higher than it was at the end of its fiscal 1996. But it is down by 966--or 3%--from total employment at the end of the company’s third quarter.

The company has started pursuing joint ventures with other firms in order to gain or develop proprietary technologies it can sell to clients. Last month, for example, Fluor said it is starting a venture with Boston-based energy engineering company Stone & Webster Inc. to build ethylene refining plants using Stone & Webster’s refining system designs. The move is a dramatic switch from Fluor’s practice of “letting clients pick whatever technology they thought best for their project,” Rollans said.

Fluor is pushing development of its diversified services unit, which leases equipment and skilled Fluor employees to clients and even competitors who need temporary help. The unit now generates 20% of the company’s pretax earnings.

The company also is moving away from the large government contracts that have been Fluor’s bread and butter for several years. Increasingly, the company’s focus is on the energy, mining and chemical industry projects that it favored in the 1970s.

Still, turning a company as large as Fluor takes time, and some analysts say Fluor’s plodding performance is beginning to try the patience of large investors. Indeed, the company’s stock price is less than half the $75.88 high that it hit just before the bad news started rolling in last February.

Rollans says Fluor expects 1998 profit to be depressed by the continued economic weakness in several Asian-Pacific regions in which the company has been concentrating efforts in recent years.

“There is uncertainty about the timing of major contract awards, primarily because of the financial turmoil,” Rollans said. “We face potentially expensive delays in Asian market contracts” that were expected to be awarded during the company’s fiscal 1998.

Some analysts are calling for Fluor to continue slashing payroll and to sell off some of its operating units to concentrate on core engineering and construction businesses. But Rollans says fixes aren’t that easy and that the company’s situation isn’t that desperate.

The company cannot simply walk away from projects that already are underway, so it will take a year or more to see results from the shifting of Fluor’s business emphasis, he said.

“We are not having financial problems,” he insisted. “We had a very difficult 1997 within Fluor Daniel, but the demand for engineering and construction is pretty strong, although the [profit] margins are not as great as in past periods of high demand.”

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Fluor Slide

Massive cost-cutting efforts helped Fluor Corp. post a strong fourth quarter, but its profit for the year fell 45% despite a 30% leap in sales. Fiscal year and quarterly sales, net income trend, in millions:

Source: Bloomberg News; Researched by JANICE L. JONES/Los Angeles Times