Fluor to Restructure as Contracts, Profit Shrink
Fluor Corp. on Tuesday unveiled a dramatic plan to streamline the giant international engineering company by lopping off dozens of business units and eliminating 5,000 jobs--about 8% of its salaried work force--over several months.
The Irvine-based company will take a one-time charge of $130 million in the second quarter to account for the costs of the restructuring. It is projecting a 40% decline in new contracts and a 15% drop in profit from continuing operations in 1999 as it scrambles to cope with what Chairman Philip J. Carroll called “significant challenges.”
Explaining the new direction to investors at the company’s annual stockholders meeting in Irvine, Carroll said a weak world economy and intense competition in Fluor’s core industries demand a complete rethinking of the company’s mission.
No longer will Fluor attempt to compete in scores of markets for jobs it can win only by slashing its prices to the bone, said the former Shell Oil Co. chairman, who joined Fluor in July.
Instead, the company will concentrate on the 40% or so of its business that traditionally provides the best profit margins, withdrawing from markets in which it has no competitive advantage and typically makes meager profit.
Carroll declined to provide specifics but said Fluor will close 15 of its 75 domestic and overseas offices this year. Combined with the payroll cuts, that will slash $160 million from the company’s annual overhead. More than half the job cuts will come from Fluor’s domestic payroll--with hundreds of corporate and engineering workers in Irvine expected to be affected. Fluor has about 2,500 employees in Irvine.
Without such cuts, Carroll said, the company cannot support its operating costs. Continued pursuit of growth for the sake of growth, he said, is “a siren’s call” that could lead to a replay of the company’s disastrous 1997--when it had to acknowledge that a five-year expansion program had gotten out of hand, causing top management to lose control of critical operating processes.
Shareholders at Tuesday’s meeting greeted the chairman’s message with polite applause, and in interviews afterward several expressed relief that Carroll was honest about the problems the company faces.
“I’ve been to a lot of these meetings and this was one of the best,” said Jack Triplett, a retired stockbroker from Santa Ana who has purchased Fluor stock for himself and hundreds of clients over the years. “He really put it on the line. It’s a gloomy story, so anything he does now is going to look better than what’s been done.”
Carroll--who is reorganizing Fluor into four quasi-autonomous business units and spending $90 million over the next three years to rebuild internal information-management systems--said he doesn’t expect the company’s business environment to improve for several years.
Industry analysts were impressed with Carroll’s long-range plans but echoed the chairman in writing off this year and, probably, the next because of the costs of the proposed reorganization and the external pressures Fluor faces.
“His ideas and goals are good ones,” said Stewart Scharf, an analyst at Standard & Poor’s in New York. “But it looks pretty bleak for this year and probably into 2000.”
Fluor’s stock fell $1.75 to close at $34.31 on the New York Stock Exchange as some investors reacted to the company’s immediate prospects by abandoning their positions. “Five years is a long time for some to wait,” said Morgan Stanley analyst Chris Gutek, who added that while the promised revamp isn’t as dramatic as some might like, it is a sound approach to fixing Fluor’s woes.
In the short term, Carroll’s plan means Fluor will concentrate on its 200 largest customers--mainly governments and large mining, petrochemical, power and industrial clients.
In the past, the company has kept more than 400 potential customers in its data banks. Fluor will not abandon existing contracts, Carroll said, but will walk away from most work in lumber processing, commercial building, pipeline construction and some other areas.
The ultimate goal, Carroll said, is to boost Fluor’s return on operating assets to 13% from the present 9% level and enable the company to support a 10% annual revenue growth rate within five years. Previously, Fluor had aimed at a minimum growth rate of 15%.
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Struggling Stock
Fluor’s shares are hovering just above their 52-week low as Wall Street waits for a turnaround. Monthly closes and latest on the New York Stock Exchange
Tuesday: $34.31, down $1.75
