Q4 2019 Fluor Corp Earnings Call
Good morning, and welcome to corporations 2019.
Okay earnings Conference call.
Today's call is being.
Good.
At this time all participants are in a listen only mode a question.
A question and answer session will follow management's presentation.
Replay of today's conference will be available at approximately 30 am eastern time today accessible on floors website investors Dot, Florida Dot com.
The web replay will be available for 30 days.
Telephone replay will also be available for seven days of registration.
A registration link also accessible on floors website, <unk> investor Dot for Dot com.
At this time for opening remarks, I'd like to turn the call over to drew some lancair drug.
Director of Investor Relations. Please go ahead.
Thank you and welcome to Force 2019, 10-K conference call.
With us today are Alan Beckman for as executive Chairman Harvest Fernandez worst Chief Executive Officer. Thank you Brent enforced Chief Financial Officer.
Earnings and that's what it was released earlier. This morning, we have posted a slide presentation on our website, which we'll reference while making prepared remarks.
Before getting started I'd like to refer you to our safe Harbor note regarding forward looking statements, which is summarized on slide one.
During today's presentation, we will be making forward looking statements, which reflect our current analysis of existing trends and information.
There is an inherent risk that actual results and experience could differ materially you.
You can find a discussion of the risk factors, which could potentially contribute to such differences in the summer.
In the company's form 10-K filed earlier today.
During this call when they discuss certain non-GAAP financial measures reconciliations of these amounts to the comparable GAAP measures are reflected in our earnings release and posted in Investor Relations section of our website at Investor day for Dot Com.
I'll now turn the call over to Alexander worst Executive Chairman Alan.
Thank you Jason.
Hi, good morning.
It's great to be able to speak with all of you again.
We have a number of items to discuss today.
And before we start I'd like to take the opportunity to introduce all new to Joe Brennan.
As our new Chief Financial Officer.
Well, Joe may be new to this role he is not new to floor with.
With almost 30 years of experience Joe.
Joe brings to the role deep understanding and expertise related to project finance and controls.
I'd like to take this opportunity also to thank Mike Stewart for coming out of retirement.
Helped the company to chart, a new path forward there isn't.
His insight and knowledge of the company, providing critical support to our strategic process that he was instrumental in establishing a process to support the actions that we've been working on since earlier this year.
And with that I want.
I want to start with what has transpired since our last call in February as it relates to the board investigation.
Ask you to turn to slide two.
With management's recommendation.
Independent members of the board of Directors established a special committee to come.
Lead a review on the accounting and financial reporting for the Radford project.
A number of additional projects.
The special Committee, along with its independent external advisors and financial experts.
I've been working throughout the pandemic to complete these reviews and put us in a position to file our audited financial statements.
This committee determined that the scope of this review.
That had full access to the company's personnel and documentation.
This investigation included document collection and.
In interviews across all floor PC segments, both domestic and international.
If I could put a finer point on the breadth of the task at hand.
We have reviewed projects from 2016 to 2019.
<unk> represented the majority of the company's lump sum portfolio based on revenue.
It's fair to say that the review was comprehensive.
Starting with oral.
Consistent with my Old Province in February 2020, the review.
The review concluded.
But the areas were related to the timing of charges and revenue and not to the magnitude.
The correct for this the company knows restated its financial results for the years 2016 through 2018 and.
And for each of the interim quarterly periods previously issued for 2018 2019.
To reflect the underlying performance of the Radford project.
I would refer you to the 10-K for a full explanation as it relates to this project.
And then in addition to the restatement one Radford we also.
We also identified several other errors that were quantitatively immaterial.
But that were also corrected the restatement.
In addition to the restated a mouse.
We also recognized in total.
Reduction of cumulative pre tax earnings that were reported through September Thirtyth 2019.
Total of $3.8 million.
Please turn to slide three.
As a result of this investigation.
We determined that we had material weaknesses.
Our internal controls over financial reporting.
In response, the company has begun to implement a remediation plan to address these weaknesses. This.
This plan includes.
Personnel actions up to and including separations for personnel involved in projects associated with material weaknesses.
Additional monitoring procedures to help ensure policies and procedures are consistently followed at the project level.
Improved guidance on project forecasting principles, including the assessment of variable consideration at the project level.
New tools and tablets to standardized documentation and reporting.
And lastly, improved and enhanced trading on required policies and procedures, including our code of conduct and our process for elevating concerns.
So while it has taken longer than hoped to complete this review and to issue our audited financial statements.
We are confident that the special committee's review was comprehensive and thorough and bulk.
I believe we are well down the path in restoring confidence in our financial reporting.
Next I want to shift gears and I want to talk to you about where we stand.
Relative to the strategic review that we held on announced last September.
And I would ask you to turn to slide four.
Very soon after taking our positions in may of 2019.
Carlos and I initiated a strategic review.
And during that review we.
We realized that we were facing significant project losses.
And those were associated with our announcement in the second quarter.
The company also experienced a credit downgrade during that time.
We knew that these losses could put serious pressure one of the company's liquidity.
As a result, our strategic review was focused mainly on two points.
Cash generation and de risking our portfolio.
And although we have had the misfortune of working through this process under the overhang of Covance 19, and the board investigation.
I'm pleased to say that we have made significant progress as it relates to reducing overhead expenses closing offices and.
Continuing the process of exiting our vehicle business.
In addition, we are focused on process prospects in our end markets that comply with our revised pursuit criteria.
And as we work according to our internal and board reviews.
Became apparent that we needed to accelerate the pace of change within the organization.
To address the reality of the world as it stands today.
So several weeks ago, we charge.
We challenged the management team to undertake it.
Very significant strategic exercise that I bill.
That I believe will result in a revised and improved approach to our markets.
And our corporate structure.
While lowering our risk profile and deriving reliable profitability.
The entire team has engaged.
And this.
Good.
And as Scott said.
Cognizant of the need to change to meet today's challenges.
Hey.
Your assist management in this.
The board of Directors has established an AD hoc committee.
To serve as a resource at a conduit for board expectations and ideas.
This will serve to align both in the early part of the process.
We anticipate intend to share this transformation strategy with the investment community in the fourth quarter.
There are however, two changes that we're making immediately.
Then it will be part of our strategy going forward.
Carlos will provide the specifics in a moment, but I.
What I can tell you that it affects how we address our markets in both the infrastructure and the energy and chemicals business groups.
Let me close by saying that at a company a steroid as ours.
Few circumstances are without precedent.
But I think we can all agree the events over the last 18 months truly are unprecedented.
Our ability to overcome adversity and emerged stronger and smarter as defined our success as a company and I.
And I have no doubt in our ability to do so once again.
With that.
Carlos will now talk about what we've encountered in our end markets.
And what we expect to accomplish and 2020 to deliver value for our shareholders and customers Carlos.
Thank you Alan and good morning, everyone.
Before I begin I also want to congratulate Joe on his promotion into the role of CFO.
Likewise, Mike for coming out of retirement to help us through some very challenging quarters.
This 10-K represents the closing of a particularly long chapter and Fluor's history.
Good day, we open a new chapter in which we look forward to giving more consistent updates and moving into a regular communication cadence over the coming months.
As it relates to our investigation and floor, we pride ourselves on being an ethical company and holding our employees to the highest standards.
Unfortunately, this with you unveiled weaknesses in pockets of our company for a few individuals did not live up to those high standards.
Well this was very disappointing I am confident that we have made the necessary changes to separate those individuals and prevent these problems from recurring.
Now if you would please turn to slide five.
Since we last spoke in February the World, We all live and work and has changed significantly.
I have been very encouraged by the resiliency of our employees and how they have adapted to this new work environment and move forward and in spite of new and unanticipated challenges.
Since mid March and majority of our office employees around the world successfully transitioned to a work from home environment.
Through the tireless efforts of our information technology professionals, our engineering and operations support efforts continued with minimal disruption.
Over the past few months, we have been slowly opening our office has on a limited basis.
To support social distancing guidelines and other protocols to provide a safe working environment.
For our projects and staff in the field, we implemented new safety and worked protocols to support Kovac 19 prevention.
A large portion of our projects continued during the pandemic as they were deemed essential.
While we did have a few clients initially requested reduction feels that.
Many of those adjustments were temporary in nature and most of our projects are currently fully staffed.
While our reaction to the pandemic was quick and nimble and we remain ready to make necessary adjustments. This fall.
Assessment of the impact to the timeline and cost to our project is ongoing.
We're having conversations with our clients on the best path forward to success in this environment and are providing notice if thats, starting our rights under change our law and for some of your provisions.
The way, we view opportunity in our end market started to change before called it.
Now pressure on commodity prices has pushed a number of our pre quoted prospects further into the future and will require further adjustments to our business model.
Now please turn to slide six.
As Allen stated, we are changing our approach in energy and chemicals and infrastructure.
Active immediately energy and chemicals will only pursue reimbursable or open book lump sum conversion APC projects.
Over time, our E C group will be increasingly geared towards reimbursable projects.
Let me stress that we are not moving away from the energy and chemicals market we.
We believe that we have the capability to be a significant presence in this space.
Many knowledgeable clients understand that their best capital program results.
When there is a balanced allocation of risk and where both parties work collaboratively to reduce overall risk.
Alan I briefly number of clients prior to today's announcement and every one of them has been supportive of this decision and acknowledged the issues that exist in todays capital market.
We are encouraged by the response and look forward to working with them as we go forward.
And the infrastructure business, we previously announced that we would exit the market in Europe, and Australia and focus on select markets in the United States.
We are further refining our approach to this market and will no longer pursue large scale projects for clients, where there is a history of onerous contractual terms and inadequate program management.
As with energy and chemicals, we believe.
We believe that the infrastructure business offers significant opportunities to us to be successful and deliver consistent profitability, but only their proper circumstances.
Competition, our lump sum projects drives a number of unintended consequences and.
And create a transactional market.
In the past several years.
Transactional process has disproportionately moved risk to the contractors side of the equation.
We were the result has been an industry wide destruction of value.
Before I hand, the call over to Joe for fighting for a financial update I want to highlight a few price projects and provide some commentary around what we are seeing across our businesses from our clients and also talk about some of the proposal prospects. We are tracking in the next 12 months.
Now please turn to slide seven.
I've been Kitimat LNG, Canada project is moving forward.
It impacted by covert 19 change of law enforcements your events.
In keeping with the local regulations, we had a considerable workforce reduction in mid March but worked with the provincial governments multiphase restart plan to resume activities.
We are pleased to report that our port workforce is now back where it was before the drawdown and we expect to increase it to 2500 on site by the end of 2020.
We believe that we are able to do this safely and with continued focus on minimizing infections.
We have strong regulations in place around.
Travel to and from the site, we're opening our Cedar Valley Lodge onside lodging in phases.
Which will allow our workforce to stay on site and have housing lodging.
Neils Entertainment healthcare and other needs on that in one location.
Currently Cedar Valley Dodge can accommodate up to 1500 workers with a plan to add another 1500.
Thats by year end and be fully operational with a maximum occupancy for fourq.
For 4500 during the first quarter of 2021.
Safety is and has always been a top priority at floor and actual occupancy will be dependent on government regulations and restrictions with respect to social distancing.
As it relates to our fabrication efforts for this project China is still restricting its borders due to covert 19. However.
But the majority of our fabrication management team are able to work remotely to progress our fabrication efforts in both yards.
We do anticipate having the balance of our management team mobilized back into China by year end.
Ending of course on government restrictions.
Kitimat site type activities are well underway to date more than 1.5 million cubic meters of Earth has been excavated with over 3 million cubic meters Backfills and compacted.
Our piling activities are progressing well.
Seeding the monthly plan and we anticipate that these activities will be 95% complete by the end of the year for train one.
And the old SPL areas.
Construction of foundations and installation of underground cables and pipe are progressing.
Proceeding.
Construction on the LNG storage tank and made off.
Offloading facility are also underway.
Once complete the marine Offloading facility will be used to unload the LNG modules, which.
Which we anticipate will start being delivered to site via marine transport in the summer of 2021.
And now please turn to slide eight.
Moving from Kitimat to the Purple line as we announced in May we made the decision with our joint venture partners to terminate our design build contracts for the Purple line rail project in Maryland.
Well this was a disappointing outcome to this project a project team exhausted all other options.
Joint venture experienced multiple delays on the project outside of our control.
And we were unable to obtain the time and cost relief from our clients.
The lack of resolution on the impacts of third party lawsuits delayed right of way acquisitions and changes to regulations and third party agreements made our continued participation on this.
On this project on sustained.
Earlier this month in airline judge ruled in favor of our consortium.
Capex at work and transition transition this project back to decline we.
We expect.
This action to be complete in the next three to four weeks.
Moving to the offshore project, we have discussed on previous calls.
We have gained alignment on the project completion date, including no co it impacts with our client and have our fabricator working to this date.
That project implying team.
Developing additional contingency plans should call that impacts the resurface.
Rather it is progressing toward at Lake 2020 mechanical completion.
We're still assessing the impact coal that has to our productivity on a site, which could push handover into early 2021.
On the F.C. Warren project.
Work is progressing and floors working amicably resolved design related issues impacting construction.
The project remains on track for our forecast a completion date in 2022.
Now please turn to slide nine.
While our commodity exposed clients are assessing their timeline as it relates to new final investment decisions.
We still see a pipeline of prospects, including a significant number of what we think.
As mid sized Reimbursable energy and chemicals projects.
Last time, we spoke I talked about our full roster of infrastructure projects.
This remains true is we are bidding on only a few infrastructure projects right now.
However, we are keeping a close eye on state DLP prospects and there will be.
Ready to take advantage of the right opportunities.
We're currently tracking a handful of projects for the Texas Department of transportation.
In mining, we still see a healthy pipeline and have been successfully winning early feed work, but they are seeing but could have seen most of the MPC scope shift into 2021.
Our major clients are focused on additional opportunities.
As it relates to copper lithium and bauxite.
As we announced in February.
Turning our government business and have been very encouraged by the New awards in 2020.
Includes the recent announcement that our joint ventures received the notice to proceed on the Central Plateau cleanup contract at the deal East Hanford site.
We were also awarded a position on the Air Force contract.
Patient program five.
Eight years.
And I'd I.Q. contract that allows us to complete it.
Compete for a specific task orders for the Air Force.
And finally last month, we announced that Nuscale received NRC approval for its design. This approval establishes nuscale as the preeminent leader in a small modular reactor technology market and allows slower to respond to customers looking for unique flexible safe and carbon free energy solution. We're in.
We're engaging with potential customers capital investors manufacturers and supply chain partners to move forward in our development effort.
We still see Nuscale as an important part of our vision of providing a wide range of environmental solutions as the energy requirements around the world continue to shift.
And now I'll turn the call over to Joe to provide a financial update Joe Thanks Carlos during.
During my nearly 30 years at floor or been in a variety of roles and I've always been impressed by the talent people in this organization.
Over the last couple of months I have been particularly grateful for all the hard work that our finance team has taken on to support our review and restatement process.
Jeff the talent in this organization is unmatched and I am proud to take on this new challenge as CFO and look forward to working closely with Alan Carlos.
The main topics I'd like to discuss today are one an overview of key financial metrics to an update on our liquidity and financial decision three.
Three an update on our outstanding initiatives and four and outlook for the business for the remainder of this year.
Please turn to slide 10.
For 2019 floor reported a net loss from continuing operations of $1.7 billion or a loss of $11.97 per diluted share.
Worth, noting that calculated as thanks for your time.
Patients for 2019, and it will revert to continuing operations for 2020 results rich.
That's for 2019 include a noncash charge of 731 million related to establishing valuation allowances against net deferred tax assets 293 million the noncash impairment charges related to equity method investments goodwill.
Goodwill and intangible customer relationships.
A noncash expense of $138 million associated with the settlement of the United Kingdom pension plan.
240 million in restructuring activities and $839 million and project adjustments and re forecasts.
Corporate DNA expenses for 2019 were $159 million up from 118 million a year ago, primarily due to the effects of foreign transactional gains and losses. Please.
Please turn to slide 11.
While we are not prepared to discuss results for 2020, I do want to make some general comments through the end of June New Awards were 6 billion led by projects and mining and government.
This is up slightly compared to the first half of 2019 with a significant majority of our awards being reimbursable contracts.
Preliminary revenue for the first six months was approximately $8 billion, including the government group, which is down compared to the first half of 2019.
Cash balance at the end of August was 2.1 billion.
And our available domestic cash balance represents 35% of total cash.
As noted in our 8-K earlier this month, we decided to undertake an interim impairment test due to a steep decline in commodity prices and the impact of Covance 19 in Q1 2020.
As a result of these impairment test, we anticipate a noncash impairment of approximately $450 million to $475 million in Q1 related to the impairment of goodwill and tangibles equity method investment assets held for sale and other equipment as well as losses associated with reserves for changes in client Chris.
At risk.
While we do not anticipate additional impairments outside of these charges, we have yet to see the full impact of covered 19 on our business and the need for other balance sheet adjustments may arise.
Moving to capital structure and liquidity, we continue to believe that we have ample liquidity to meet the demands of current projects and future prospects since the last call call floor down was downgraded to a non investment rating by Moody's. While this was unfortunate and counter to the actions, we're taking to stabilize and improve our credit rating.
Over time, it did not have a significant impact to our operations.
I also want to point out that we have amended our credit agreement to allow us to complete our filings by December 31.
And early August we received a notice from the trustee as it relates to the timely submission of financial statements for our bonds, while the filing of our 10-K and our expectations as it relates to the timing of the subsequent 10-Q, we intend to be compliant before the end of the care period.
Before I discuss our outlook I want to provide an update on a few of the financial initiatives that were addressed on the strategic review call last year and 2020, we have continued the process a process of monetizing our investment in America, our equipment rental business in the past few months, we sold our operations in Jamaica closed operator.
Actions in Mexico, and sold the equipment rental business owned by store as.
As for the remaining and makeup business, we received bids last month and expect to make an announcement on next steps in the near future.
We are continuing to progress on reducing overhead expenses across the organization we have been.
We have accelerated our cost reductions post coded and expect to exceed our previously disclosed disclose run rate of $100 million in annual savings by the fourth quarter of this year well.
While our initiatives around Pvthree monetization and real.
In real estate have proceeded slower than expected. This year. They were remain important contributors to enhancing our cash position.
Please turn to slide 10.
Since our last call in February we have experienced a significant shift in our end markets. As a result, we feel it is prudent to suspend our guidance for 2020 I know.
I know the importance of guidance to our investors and I look forward to providing 2021 guidance. After we file our 2020 10-K here but.
Here's what you can expect over the next few months, we expect to file Q1 2020 results within the next month.
Paul at approximately four weeks later by Q2 2020 with Q3 results approximately four weeks after that.
We will host our next call with the investment community in conjunction with the release of our Q3 results.
As previously mentioned our cash balance at the end of August was $2.1 billion.
I expect that cash balance to remain around that level through the end of 2020. This includes cash needed to fund problem projects floor has.
Floor has adequate liquidity to meet all operational and project needs and has no amount drawn on the revolving loans under its credit facilities before.
Before we open the call for questions I want to remind you all that we are only able to talk about financial results from 2019, we are working to get current on our financials and look forward to discussing 2020, when we close the books for those quarters in the coming months with that operator, we're ready to take questions.
Thank you if you would like to ask a question you missed signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment once again star one for questions.
Well go first to Jamie Cook with credit Suisse.
Hi, good morning.
Good to hear from you guys. Finally, I guess a couple of questions one.
Just as the announcement that you will no longer be pursuing cakes price competitive energy and chemical projects.
I guess just take it take it sort of a step further you know why even consider opened bulk lump sum projects in why aren't we considering exiting fixed price work and and how the segments outside of energy and chemicals.
You know what you sort of given the problems that we had in infrastructure power or even within government on lump sum projects.
And then my second question, Joe Pete Congrats on add that the CFO role Q questions to you what are the metrics say the CFO that you are going to use to start and evaluate Florence project relative to how prior CFO I was looking at the business, whether it's more of a return that your backlog of earnings et cetera.
And then my second question just based on the commentary with regard to me.
With regard to we cannot cash flow through year end and not it seems you know.
Funding problem project et cetera can you just give some more parameters around what years, assuming I would say that the negatives and positives associated with cash flow and particular funding problem projects. Thanks.
Jamie Good talk good hearing your voice again, good talking to you again.
With respect to fix that lump sum fixed price projects as we said, we're only going to be big negotiating those in the energy and chemicals.
We're not going to bid against anybody.
And our clients are receptive to that and infrastructure, obviously, we can't.
Not it competitively lump sum projects, but we're only going to do it in a very very selective way.
We're still dealing with legacy of infrastructure projects and we.
And we announced some charges on those projects, but I can tell you that nothing has been signed up since may want to 2019 that does not meet our very selective criteria and we learned some lessons obviously, we're going to be.
We're not going to be bidding projects, where we don't think that the client can properly manage the project in terms of the rest of the business. We are really not doing much of any lump sum work anywhere else, we're not doing it and government in any significant way and with respect to mining that's primarily a reimbursable business. So we've really narrowed the scope of.
Lump sum work across the business.
Jamie This is Alan a very good question.
I think you have to look at the last couple of years and I think as we went through this investigation and you'll see the words in our 10-K. It was a very optimistic view of being able to bid and not.
Great follow up on on strengthening our risk assessment.
Criteria.
Flora in the past.
In lump sum projects, where we get the opportunity to work collectively with the coil.
To take the risk off the table to pursue a reimbursable costs fashion and then.
And then to convert as we just as we go into the field has always been a very successful model for us it wasn't successful to date.
To the extent that it was practiced.
Previous few years again, because of the optimism and the Alaska lack of crew risk assessment.
Carlos and I are absolutely committed and I think the our investors can take for granted we're not going to let anything come in to this backlog that doesn't have the proper terms and conditions than the proper assessment that a lot of risk.
So I think we're going to be able to address our clients are that way and I think we can be a very strong player in the energy and chemicals now I do think one thing will occur you will start to see a more rational shift in percentage of backlog that goes to reimbursable cost by following this model but.
So I think we'll have a reliable backlog and one that we can bring to the bottom line.
Yes, thanks, Thanks, Jamie in minutes.
Good to talk to you.
I'll hit the metrics phenomenon.
The play off the back of what Alan just said I think the first key that that I'm looking at and is truly.
Truly kind of the benchmark is what do you put it what's the quality of work that we're putting into backlog.
And in terms of not only mix, but how we go through our bidding process and we've we've narrowed the bidding process up over the last six or eight months and even on today's call. We've narrowed it even further I think thats the starting point for the quality of your earnings downstream certainly cash flow.
And terms and conditions in those contracts and how we can get out in front of the cash flow curve and ultimately what we do with that within our cap structure. So those are probably the two.
Biggest.
Points that I'll be I'll be looking at as we started this in terms of where we are and funding our lost projects.
As we stand on an outlet basis for 2020, we will have funded nominally 400 million.
The loss projects.
While maintaining.
$2.1 billion in cash and we will have a carry over into 2021 of an additional 2021 and beyond of an additional 200 million that will we will be funding over the course of probably two years after that.
Okay. That's very helpful. Thank you I'll get back in queue.
Thank you we'll take our next question from Steven Fisher with UBS.
Thanks, Good morning, Congratulations on all the progress that you guys made here.
You mentioned that the the strategic review is still ongoing wonder if you can give us some sense of the possible outcomes of the rest of that review.
I mean, it sounds like the board's still believes that floor should be at MPC firms in some way shape or form.
Or is it potentially to evolve into something else or are there.
Full end markets or.
Business lines, its floor could exit or maybe even possibly a sale of the company how should we think about how.
How how big this scope and dramatic the outcomes could be.
Yes, Steve Thank you for that question.
You know I want to go back to Mike.
Remarks that I made.
Beginning of this call.
I think you have to contrast, it with what we did and we came out with in September of 2019, our outlook, specifically, even though we we've looked at a pretty broad.
Our list of options our focus at that time was really getting control of this backlog of making sure nothing else came in but could be harmful to the company and also strengthening our balance sheet that was absolutely the focus and thank goodness, we Carlos and his team.
The things to basically give us.
Back in equilibrium of cash flow and we were able to pull back our decision on selling the government business.
And that was a very positive outcome for us that we no.
Not really the decision we didn't really want to take in September, but we have to.
Yes, I know contrast that with where we're at today could come out of this investigation we have.
We have we have put ourselves back in balance in terms of getting a handle on our backlog and making sure that nothing else comes in well position to really look specifically at how this company should be structured going forward and I will try to pre.
Try to pre judge.
How what the results of that are going to be because we're we're in the middle of that right now, but I do think it's even as we stay in APC and certainly in certain areas.
We're going to be much much more focused on what I call the value added services.
That is even within the PC side.
I think thats just thats above.
Directionally to undergo how that unfolds in terms of the structure of the markets, we address will be coming out and giving very specific information on our actions there.
Thanks, Alan for that very helpful. Just also you guys mentioned the notification of.
For some as Youre protections declines can you just clarify.
What that means does that mean that there are on a path.
Unimproved cost increases at that floor will still need relief on.
And how broad are those certifications and then I guess just can we assume that if there were any material cost overruns on any of the projects in 2020, you would have to disclose that today.
Yeah. Thanks.
Steve.
There are couple of a basis for us seeking.
Relief on cost and schedule force majeure being one of them and then the change in law provisions in our contracts and.
In general across our portfolio of projects clients recognize that over 19 has impacted our schedules and cost and for the most part we're in discussions with clients on how to us.
How to assess the impact any impacts or not.
Quickly and easily access they have not.
Knock on effects down down in line with the schedule. So were in discussions with clients on that to the extent that we get to a position where we would run.
Recognize or not recognize.
[music].
The cost impact of.
Covert 19, we will disclose those but at this point, we're comfortable where we are from an accounting perspective, and with respect to the costs that we're incurring on projects.
Okay terrific and welcome Joe Thank you.
Thanks Nate.
Thank you we'll take our next question from Andy Kaplowitz with Citigroup.
Hey, good morning, guys.
Good morning, and good morning, and photography, good talking to you Carlos or Alan you think it is asking specifically about our than you can in one sense and you mentioned the workwear workforce reductions there is the price.
Is the project behind the original timeline now because it depends I think.
Yeah, Andy Thanks for that question. The LNG, Canada is it is behind because of the pandemic and.
And both the client and often we acknowledge that and we are engaged in discussions with.
In discussions with a decline of pockets in fact, we had a conversation yesterday and I met with their some of their leadership yesterday, So having said.
Having said that the project it has been progressing very well.
Very well.
I know that.
People are concerned about this project but.
On an overall basis.
Take a composite of the engineering procurement construction fabrication et cetera.
This project is about 27.5% complete now obviously, that's not construction construction is less than that but.
We're comfortable with the progress that has been made to date.
To date, we mentioned in our prepared remarks that the piling has gone very well we have had concerns about the padding that well, we havent that others have expressed concern about the filing not going well, but it's actually gone very well will be done this year. So so we're.
So we're we're very comfortable with where we are obviously covanta has impacted everyone and the client and I have had those discussions for for some time now.
So.
At this point things are as well as they could be under the circumstances.
Helpful Color and then consolidated backlog at 32 billion at the end of 2019 Godfrey mentioned the pandemic disruption and it's caused so just given your customer conversations do you have a view when you think that Glenn could turn do you see bigger awards to develop in the first half for 21 days to wait.
To the end of 2001, or even 2002, and then separately could you tell us how much of your you can see backlog, it's competitive VPC lump some big contracts you know the stuff that you want to get ahead of at this point.
Well, let me start with that last question first obviously LNG is a big part of that backlog and they can see and it's in it's lump sum, but but it is a lump sum that we're not nervous about because it was negotiated.
It was essentially a negotiated lump sum of the client that was another competitor, but they really want a serious competitor.
Don't know the exact percentage, maybe Joe have that but if you look across our business.
We have.
We have a government business that no.
Not been impacted by the.
Pandemic at all it's actually been doing very well and we do have we do expect to be leaving Afghanistan next year. So that's going to cause a little bit of impact. We've got a life sciences business that we have a lot of good prospects on.
We have a mining business, which while down now because commodities, we see a lot of it where do.
We're doing a lot of feed work and expected 2021 and 22.
Thanks, Good projects will move forward in energy and chemicals, our conversations with our clients are such and obviously this is not a surprise oil prices being where they were on whats happened to that industry, they're being very very selective and and.
And things that pushed out for sure, but the people that we speak to are still.
Telling us that they have significant capital.
Capital projects planned and we'll be pursuing those.
2021, 2022, so so.
So overall I think our prospects are very reasonable given where we are at the bar.
The markets that we're serving and we're optimistic that in some of these that we're going to be doing.
We're going to have some some growth opportunities with government life Sciences and mining.
And he said.
One point of your question.
With respect to the projects are still in our backlog.
The competitive lump sum really with the exception of LNG see all of the ones that have been problem projects were competitively bid.
And that will be as I said thats a practice, we will no longer be area.
And Joe can I, just ask you want to follow up on the new disclosure that you had for the first half of the year can you tell us how much lower the two was in Q1.
Given we know there are projects competencies in Q2, so we would be helpful to understand the run rate going into the pandemic excuse me.
Andy I Miss we missed the first part of your question.
Just.
Pete.
Yeah, you disclose the.
Yeah.
Billion, just curious as to Q2 versus Q1, if you could disclose that because obviously project stoppage is must have impacted Q2 significantly more than Q1.
Yeah.
Andy I think what we're going to.
When we get to the Q3 filing and were able to have a little bit more open dialogue around that I think we'll be able to go through those metrics, but I think at this.
I think at this time were confining our comments mostly to 2019.
Yeah. Thanks, guys.
Thank you we'll take our next question from Michael Dudas with vertical research.
Good morning, everyone.
Morning, Mike.
Well well Carlos.
Looking through the 10-K.
Jason.
Softens and discipline obviously.
The events that occur.
Well, you guys took over and such.
I know you guys was from the deep dive from this whole process.
Now.
Additionally, the company.
The culture and like Keith will you.
So going forward, especially in the light of certainly it seems like this is the reduction in size.
The opportunities or the size of the business.
No change or maybe what it was several unusual on that please.
Solutions.
As we look into that.
Mike We had a little difficulty hearing you, but I think.
I think I think you were asking about some of the things that we are under investigation.
And.
And what what was clear what's clear is that during the last five or six years, we as well as others in the industry and the industry had been pursuing a growth strategy and in an.
In an increasingly risky environment and we were.
Unrealistically.
Optimistic in our pursuit and the way we chased projects to win.
That clearly has changed we're going to we're going to be very objective and realistic with our criteria.
So I don't I don't see us having.
That same kind of risk profile.
The risk profile, we won't have the same kind of risk profile going forward.
I may not have answered all your question, but if you if you want to repeat it or was it was sorry, you were breaking up a little bit there, Mike, but I think.
So to the extent that the decision we're talking about lets say in energy and chemicals.
There is it will it will Uh huh.
Reduce our addressable market somewhat but that's a that's actually I see that as a very good thing.
In this investigation one of the things that we saw was a growth strategy that was flying right in the face of that at a time, where our clients were turned in very transactional and having a procurement led the bids.
Contracting.
And so I think thats the drives us to the decision. We just stayed in energy and chemicals for the success of the market and the part of the market wants to be transactional continues that load, we're not going to play out.
So anything we address I still think we have a great opportunity working with clients to to have a significant backlog, but it'll be done on a basis that we can perform against them. We can be successful not just that floor vote for our clients as well.
Carlos mentioned the discussions we've had over.
Over this last week very very encouraging discussions I think our clients.
Saying, what's happened in the industry. They are saying you know a number of our competitors exit.
The industry.
And we're still there, we're not leaving us with Mr. But we're going to play into it in a very very different set of rules.
And back to the clients plants that they indicated to us.
Directly or indirectly that they want to stay in the market in the oil and gas market, but.
There they understand that Theres no way that we're going to be.
And projects and taking a competitive bid projects that we have in the past and very very understanding of that position.
Ill conceived by just to qualify that indicated before.
The strategic review that's ongoing.
We will have the final results of that review by the time you lose.
Well the results and some bad investments and the user is going to be.
That's a target of some.
It's harder to sometime in the first part of 2004.
But right now our target is to do this towards the I would say the latter part of Q4.
So I suspect, we probably will have to put out our Q3 results by the time we have this.
Discussion, but when we do this we'll do it in a way that really does give us a broad audience was at our investor committed.
And probably have a pretty significant investor call to announce the results of this.
Lets and look forward to it thanks gentlemen.
Thank you well take our next question from Andrew Wittmann with Baird.
Oh, great. Thanks for taking my question guys.
You know, it's remarkable that the level of detail. That's your investigation went through every job over $50 million et cetera, et cetera, and yet.
$3.8 million in pre tax adjustments only a timing not on magnitude. So obviously, that's undoubtedly pretty good outcome are there implications from that but.
People are considering that so much that seemed like it revolved around the warranty contracts.
Implications on the Geo Jay input inquiry.
He could positively or negatively but it seems like it might have a positive implication there but are these related and why extrapolating too much and what can you say about what the accounting indication you need for the DJ inquiry.
Well, we are continuing to cooperate with the FCC and the D.O.J.
Our sharing the results of our of our investigation with them.
That their process will continue on and we'll continue to work with them. So I wouldn't hazard a guess as to what that will mean.
It's hard to call. The fact that we had an investigation at all in it.
Positive sales.
But what I do think we learned a lot coming out of it.
I think in addition to the restatements the material weakness was we did we have learned some things that strengthen our controls.
Let them, even stronger and then we're going to we as I said, we're going to implement those changes and the lessons learned throughout and have already started out as a lot of.
Yes further to that the you know we've been as you might expect we've been totally transparent with the agency.
And I think.
I think you're right there and we had we found some things that we can improve upon that.
Overall.
The statement.
Quantitative basis did not.
Has significant impact other than the rat record project so.
So we don't know how long we can't talk about it.
Speculate as to how long this will take or what might that be.
But we are fully cooperating.
Okay. That's fair I also wanted to ask I guess a question for Joe on the balance sheet here in the comments that you don't expect the cash position to change much between now and year end is that inclusive of the assets that you have for sale or would any of the assets Mikko portion.
But you still have the ppps to the real estate that you're looking at potentially excellent exiting here would that be it a positive cash impact between now and year end or how to think about that and if you could is there something on at least on the balance sheet that you could point to.
For the the value the ppps or the potential capital that you could raise from all these sales just so that we can get a new perspective. Previously obviously you can we talk about you know over billion dollars in at least government in the meat go in.
Now governments out I think you've updated that so if there's any way to give context for what the proceeds from the asset sales could or should be I think that would be helpful for all of us.
Yeah, Andrew it's it would be accretive to our current projected ending cash balances for 2020.
And if I were looking at a range it somewhere.
Somewhere in that $2 million to $300 million range would be.
Something you and you can probably consider.
That's super helpful. I wanted to ask one last question here just regarding the fact that you guys have been adjusting your cost structure in line with the new business opportunities and an understanding that there are some you know.
Some of these loss, making contracts that are flowing through at zero margins today, but as those run off over the course of the next couple of years do you feel like Carlos but the 50 the cost structure at floor in a position to deliver margins back when when floor was executing more efficiently.
And in line with the company's goals and then I guess EBITDA margins were more in the 4% to 6% range I mean.
The new revenue base in the new cost structure going to be aligned to deliver it at that level of performance or how should we think about that.
Yeah, well the answer to that is yes, but let me let me elaborate a little bit more I mentioned earlier that we don't have a number of what I call legacy infrastructure projects that are they.
That as we have progressed into the field we have.
Hey, they in a position to better assess where we are on those projects and and you will you saw where you will see that there that we took some charges on those projects.
However, those and those projects I can't guarantee that there won't be taking additional charges, but I can tell you that right now we feel good.
Given our where we are we have assessed these projects that were.
We are absolutely a booking and the charge is appropriately we'd have a very very operational focused management team in that business group. So we're feeling pretty good.
Pretty good about those obviously, we still have to run those out in time.
In terms of the cost structure.
We started last year with a reduction in the run rate of $100 million.
Per year, we achieved that run rate last year. This year, we're going to exceed $100 million in cost reductions that excludes.
That excludes restructuring and some of the cost of the investigation, but these are for the most part I think with cost reductions that will will.
Well not be too will stick and be as part of our strategic plan.
We do we will also be looking at a bottoms up.
Cost structure consistent with the way we.
We come out of this review so I'm very positive about the cost reductions and that's translated into among other things to the very high.
Very healthy cash balance that we've been able to maintain this year as we have funded some of the lost project.
Great. Thank you very much.
Thank you we'll go next to Sean Eastman with Keybanc capital markets.
Hi, Tim Thanks for taking my questions.
I just wanted to start on the sort of.
Sort of problem project portfolio the disclosure in the 10-K indicated about 1.7 billion of backlog.
Projects in loss position.
Just wanted to get a round up of or update on how many.
How many projects represent that number how much of that burned been 2020, and how much burns and 2021 and beyond.
Yeah. Let me just tell you went down that asked Joe to answer the rest of the day that 1.7, I will be reduced by between five and.
550 million, because we will be taking the purple line out of that number as we transition out of that project. So that really gets us down to below 1.2, Joe you want to add further yeah.
China, we're looking at approximately 16 projects that make up the total.
Excluding a purple line now when we take it out in Q3 from backlog at the end.
At the end of the day and as I mentioned in the opening question in response to Jamie.
We're.
We will probably burn through approximately 400 million of those loss provisions in 2020.
We've had some additional losses for Q4.
Which then puts us in a position where for 21 and beyond will be.
Passing another but nominally 200 million.
Through our cash flow models for loss provisions as well.
Okay got it that's helpful, but you know, but how many of the projects.
How many of the dubbed the 16 projects will actually be finished in 2020 and.
And how many will complete in 2021 and beyond.
That's a good question I don't know the exact numbers, but many other projects. Many of the 16 number of a 16 app have already been completed.
Obviously I'm a little Purple line was not one of the 16, but that's going to be up I think we've got the offshore project, that's still being completed.
Got it to a government projects that are going to be completed one late this year and the other one point 22, and the infrastructure projects that were part of that they are well well along.
They are not that many some of them will be completed this year.
I can't I can elect to get back to you on on what which one.
Which ones are going to be completed pack this year or next year.
Yeah, and maybe I'm not sure I've got a little bit of data in front of it yeah, a little bit of data in front, we're looking at about five or six of the IND for projects that will still have a tail.
And the offshore project, but the other projects relative to power and Radford will.
Will this.
Essentially be closed out this year and then we'll have some follow on work for the worn project moving into 21.
Okay got it and maybe from a higher level just thinking about this.
Further tightened a bit parameter for the entire segment.
Yeah I'm just curious you know as we stand today what the.
Bid pipeline looks like within that new philosophy for a bit I mean it.
There you know.
You know a significant amount of work out there that you know you can realistically when under.
These new parameters.
Is there a particular sub sector within in C.
That we should be laser then on where you see that type of a bell.
Balanced risk profile.
And maybe what does this new bid parameter named for sort of the go forward normalized CMG segment margin.
Margin run rate.
Well first of all on way, we can win work under this new profile.
Profile absolutely in fact, there are a couple of projects that we've converted from that decline rate to convert from lump sum to reimbursable format.
So that's that's not a concern of ours at this point in terms of the prospects, yes prospects in oil and gas are downright out because that's not that's not surprising.
So.
Hi, I'm not concerned about our ability to compete in that market.
No.
Okay I appreciate the responses in the time, thanks very much.
Thank you we have time for one final question, we'll go to Michael Feniger with Bank of America.
Hey, guys you have in store for sneaking me in notes with us, but can you just help create some buckets of your cash balance I won't.
At one point this year within the 1.72 billion range and now that 2.1 can you just give us some buckets of how your your cash balance is actually slightly slightly up I know.
I know you are you can try to finish with this range by the end of the year just walk us through you mentioned the $400 million of broken projects. It's getting this year I think you said something about asset sales for their project close outs is there anything else, we should kind of keep in mind. When we're what we're thinking about that that cash balance and the.
Second question on that is I think before 2020, we thought 500 million.
Cash used for these broken project.
You bet.
500, now 600, because its 400 this year and 200 million 2021, and just to be clear you know it.
All the disclosure and commentary you've given us on 2020 does that mean, we wont see that number.
Dan, but more other projects be added to that I know there are the impairment charge.
Did you guys have already conducted but does that mean, we're in a clear and when it comes to project charges and write downs when we get the 10-K, when we get the pink using Q1 and Q2 based on the commentary.
Yes, Thanks, Michael for the question, let me, let me start with the cash balances what we've seen as part of ongoing operations and project Closeouts that represents a fairly significant portion of that cash growth.
I think the the other element of that is the restructuring plan that was initiated.
Towards the beginning of 2019.
Closure of offices.
The reduction of the footprint and subleasing.
Has generated a significant amount of cash I think Carlos alluded to the 100 million and in my comments as well.
That seems to be sticking at the end of the day.
And then the sales of certain discrete assets have all contributed to those cash balances, but I think the lions share of that is just kind of the ongoing operations as we see them today and and the positive cash flow that we're getting out of our our non problem projects I think one of the things that's important to notice it.
We looked at our backlog relative to those projects problem projects and only represents 10% of our backlog.
So we have another 90% of our backlog that is that is healthy and is generating operating cash flow.
And in terms of the yet in terms of the 500 as what we had mentioned in in February you're correct. In in Q4, we had some additional challenges on on on the different projects that are have a and and our offshore projects that have created some additional cash flow.
Cash flow requirements into 2021 and beyond so that number is at 600 million today.
Okay.
That's helpful and then I'm I'm, just wondering Joe I mean, Mike Stuart mentioned before 2020, he wanted to really double the cash on hand, you wanted to pay down from major billing dollars. They go to pay down debt and double the cash on hand.
Now we've had this massive pandemic in commodity downturn is there.
Any kind of change in your guys. If you have that how much cash you guys need on hand, and then we just mentioned this 500 million number that sometimes it's kinda creeped up keep it 600 million and you need to post additional cash collateral for project guarantees or letters of credit.
You can kind of shed light on that and how you're viewing that country. You know as you go into 2021.
Well now and I know, it's hard to determine where the pandemic is going to take us at the end of the day, but I think what we had mentioned in one of the previous questions that we were.
Questions that we received as you know we still have other assets that are for sale that are accretive to current cash balance, which will help balance out cash requirements moving forward and what we do and turn in terms of balancing our capital structure and.
And if that's buying down some of the debt, we'll take a look at that but there still are some moving pieces out there that have not been part of.
Our war chest relative to our cash balances.
Mike. This is only one of the things I think maybe you could live we could leave this conference call with US we are moving out of this troubled backlog. We're we're processing through these projects were completed and we're making sure that nothing comes out of the backlog that causes US go to Harvard Yes. So as we go forward, but we're going to continue to see I think a strengthening cash flow and overall more bugs.
Good position for floor, that's our goal and I think you can follow when we come up with Q3, you can then judge and see how we're doing against that.
Okay. That's helpful.
That's helpful. But just we talked a lot about you disclose a lot today on 2020, which is really helpful.
And just you know and you guys have already kind of shed light on the impairment test that.
Given that the actual indication on on in Q2, and the second quarter, we did you're still probably see project charges and write downs, we'll see.
Q1, Q2 results or is that kind of already been disclosed that you guys have talked about being on on target on schedule. So far progressed, while LNG, Canada into these projects.
And thanks for that question you know I can't tell you that there won't be but I can tell you that that we're very comfortable with where we ended up in 2019 on on terms that project charges.
Okay. Okay that was helpful. All right I got it thank you.
Thank you appreciate your time.
That does conclude todays question and answer session I'd like to turn the call back over to Mr. Hernandez for any additional or closing remarks.
Thank you operator, and thanks to all of you for participating on our call. Today 2020 has a truly marked an unprecedented chapter four floor ask over 19 has changed the world, We all live and work and hear it.
Here at floor, we have also had to navigate through our internal project reviews management changes, while managing uncertainty in commodity prices we.
We remain convinced that we're on the right path forward and once again, we want to thank you art stakeholders and shareholders for patiently navigating through these uncertain times with US we look forward to updating you. All again soon with 20 claim financials greatly appreciate your support for a floor and thank you.
That concludes today's call. We appreciate your participation.
[noise].