Q2 2019 Earnings Call
Please standby.
Good day and welcome to floor Corporation second quarter 2019 earnings call today's call is being recorded.
At this time, all participants are in listen only mode.
A question and answer session will follow management's presentation.
A replay of today's conference call will be available at approximately 830 P.M. eastern time today.
Accessible on floors website, <unk> investors dot floor dot com.
The web replay will be available for 30 days.
A telephone replay will also be available through 730 P.M. Eastern time on August eight through a registration link also available on <unk> website.
Investor Dot floor dotcom.
At this time for opening remarks, I would like to turn the call over to Jason when camera director of Investor Relations. Please go ahead mr. like Cameron.
Thank you operator welcome to for second quarter 2019 conference call with US today are Alan Beckman floors Executive Chairman Carlos Hernandez supports Chief Executive Officer, and Mike Stewart Force Chief Financial Officer. Our earnings announcement was released this afternoon.
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 two.
During today's call and slide presentation, we'll 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 can find a discussion of our risk factors, which could potentially contribute to such differences in the company's Form 10-Q filed earlier today and our 10-K filed on February 21st.
During this call we may discuss certain non-GAAP financial measures reconciliations of historical non-GAAP amounts to the comparable GAAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at Investor Dot floor Dot com.
Now I'll turn the call over to Alan Beckman floors Executive Chairman Alan.
Thank you Jason.
And good afternoon to all of you.
Let me start by saying that I am.
Extremely disappointed in the company's results for this quarter.
And I'm also very aware, we owe you a complete explanation of the issues.
And our path.
Carlos Mike and I.
Committed to doing just that.
As a result of my 36 year prior career with floor.
I have a very deep loyalty to this company and its people.
And it was that loyalty that drove me to accept the position.
Executive Chairman.
And also because I felt that I could team with Carlos.
To successfully address our issues.
In my previous tenure as CEO I hope that I earned a reputation for strong execution and transparent communications. So it's with that in mind that I began this discussion.
If you would please turn to slide three.
On the first of May.
The board of Directors appointed me as executive Chairman and Carlos as Chief Executive Officer.
They then commissioned us to affect a complete review of the business.
The first and major part of our review was to meet and talk with the business group leaders regarding their project teams clients suppliers and subcontractors.
To allow us to assess all of the risk projects in our backlog.
The second part of our assignment was to evaluate and modify as necessary or bidding and execution strategies to ensure that going forward. We can have a high quality and reliably profitable backlog.
Next we assess the organization its leadership.
And it's covered us to make sure that we have the right team and structure in place.
Several major investments that you're aware of the made in the last few years.
Our next task force to take a critical look at the performance of these investments and recommend any necessary actions.
Given recent project losses, we also engaged in a review of our balance sheet, our cash flow and liquidity.
The last part of our review was regarding our current portfolio of businesses.
We have begun an analysis and each of the business lines and its position and performance within our corporation.
This will result in a recommendation to our board of directors of what we believe to be the optimum mix of markets and services that should comprise four corporation.
As you can see this was a comprehensive assignment.
And for the last three months, we have been relentless in looking into every aspect of what I've just outlined.
One of our first actions was to bring back Mike Stewart as CFO .
Mike as many of you know previously served as our CFO from 2001 until 2012 and rejoined Fluor in June .
We also engaged lazard as a strategic advisor.
These two critical moves have given us significant leverage.
In assessing our situation and options.
Our review included a strategic session in June with our entire board in which we discussed our initial findings and outlined the initiatives that we are pursuing.
Recognizing that today, we have a lot to accomplish on this call.
Let me start by outlining the order of our presentation.
First of all I will begin with a summary of actions taken by Fluor's Board of directors.
Then I will turn the call over to Carlos to review regarding the status of our finding and actions to date in this strategic review.
Lastly, you'll hear from Mike Stewart, our Chief Financial Officer, as he provides a financial update and his initial priorities.
Carlos and I have met with many of you.
Buy and sell side community as well as clients and employees.
We've listened to what our stakeholders are saying and we're using this feedback as a guide for the changes we are making inside our company.
The issues, we are discussing today are serious.
But I am convinced that they are solvable.
I also recognize that our markets are changed and I have personally observe the clients today have transferred significant risk in liabilities to contractors.
And this has impacted our entire sector.
But very importantly, I also believe that fluor does not have to accept these risks and we are working with our clients to better balance these in future contracts.
We can also achieve project success with all of our employees have a commercial mindset.
They have a strong understanding of the contractual requirements and employ our strategic vision.
Which is an unwavering commitment to safety.
Cost competitive innovation and excellence in execution.
But before we get to the quarterly results I want to update the investment community about recent actions by the Fluor Board of directors, if you would.
I'll ask you to please turn to slide four.
Our board absolutely recognizes the gravity of this announcement.
And has taken steps to improve our visibility into the contracting process, including the risks that we're assuming a new projects as well as how we are approaching in executing our existing risk projects.
At yesterday's Board meeting.
The board formed a risk committee led by Jim Hackett.
This committee's role is to assist the board and fulfilling its risk oversight responsibilities.
It will oversee and review with management, the risk framework and regularly monitor compliance.
We believe this committee will enhance the board's exercise of its duties in keeping with our mandate of good corporate governance.
And lastly.
While we have a very strong board.
The challenges and market conditions to fluor is facing today require that we initiated a process to bring on individuals who have additional capital project and industry expertise.
We will not be increasing the size of the board.
But expect to announce at least two new members by the end of September .
And while these initial efforts are a start in the right direction, they're only a portion of the changes that we intend to make.
We expect it to include conclude our strategic review within the next eight weeks.
And to explain our path forward in detail.
During a webcast on September 24th at eight am Eastern time.
I encourage all of you to put that date and time on your calendar.
And with that I'll now turn the call over to Carlos to talk more about our operations progress on changing our strategy and what he has been doing to meet the boards expectations Carlos.
Thank you Alan.
Let me start by sharing with you the actions we've taken during my first quarter as CEO .
And provide you some details on our path forward.
And again I've made a number of changes to improve the effectiveness of floors executive team.
Please turn to slide five please.
In addition to bringing Mike back as CFO .
I appointed Mark fields, as the president of our energy and chemicals segment.
Mark has nearly 40 years of experience, including extensive Mega project execution in upstream refining.
Mining chemicals and petrochemicals.
Also we have separated infrastructure into a standalone business segment to increase transparency.
With Terry tow as group President reporting directly to me.
Terry has been operationally responsible for 11 infrastructure projects.
Over the last 10 years.
Finally, we have moved risk management under long time, lower executive Gary flowers.
And expanded his authority to enhance reporting and accountability of this group.
Yes, it is particularly well suited for this role as he has provided support and has been instrumental.
In developing resolution strategies on a number of challenging projects.
During his career.
As Alan mentioned, we have a heightened focused on our risk profile.
We have increased transparency and accountability throughout the organization.
Please turn to slide six.
It has become apparent to me that there are a few significant and common issues in many of our challenged projects.
In May we immediately implemented a more rigorous framework to our pursuit process.
We have already enacted changes in our bid no bid process, so that our future backlog will be comprised.
Of high quality projects with a contract structure and execution approach.
That will generate improved risk adjusted margins.
To that end, we have set the following pursuit criteria for new projects.
For energy and chemicals, we will only pursue fixed price work, where there is a limited bid slate and we have identified a quantifiable advantage over other bidders.
Or where it is a sole source negotiated lump sum agreement.
We would only bid on projects, where fluor executed defeat package or otherwise was allowed to perform sufficient due diligence.
And infrastructure, we will focus our efforts in North America.
And continue to extend our presence in states, where we have an established track record and strong relationships.
These include Texas, Arizona, California.
Virginia, and North Carolina.
In the government segment, we will no longer pursue lump sum projects.
Our lump sum projects in terms conditions must have an appropriate allocation of risk between client and contractor.
And in all cases risk projects will be subject.
Two additional bit no bid approval followed by later final approval by the floor executive team.
This increased focused on cell activity will change the profile of our prospect pipeline.
Because it is important that we drive our company into a backlog and execution platform.
That can deliver consistent results.
Although that trend in our industry is to pivot away from lump sum work.
We still believe that floor has the talent and expertise to win and execute these projects, albeit on a more selective basis.
But it's simply.
Focusing on profitability and cash generation.
Well not bid on large scale lump sum projects that don't meet our criteria.
But there are lump sum projects that do meet our new standards.
We are successful for example on being awarded the rumor LNG project I can assure you that this project has gone through increased scrutiny by floor and adheres to our newly revised risk management approach.
With regard to our current backlog.
One thing that has become exceedingly clear to me is that we must take a more disciplined approach to risk assessment on our projects.
We have identified our challenges and outline what needs to be done.
Additionally, we're making changes to how we approach engineering and project management.
To ensure our projects are staying in sequence with work not commencing until the appropriate reviews are complete.
During the second quarter.
The company met with a number of our clients subcontractors and suppliers.
In an attempt to resolve a number of matters.
These include ongoing disputes ending change orders scheduled extensions.
Close out items.
Unpaid receivables and our position on outstanding claims.
As a result of these discussions clients settlements and revised estimates to complete projects.
The company evaluated decision on a number of projects.
Which resulted in a pre tax charge of $714 million.
These charges impacted broad range of projects, including certain projects that remain profitable.
Furthermore, our margins will be lower than normal based on the timing of awards in our proposed in our prospect pipeline and the impact of projects discussed today.
Now if you would please turn to slide eight.
In energy and chemicals results for the quarter include additional project adjustments of $186 million relating to an offshore project.
You have heard us talk about the offshore project over the last two quarters.
And the challenges we have faced as a result, the significant growth from our feet package from others.
As a result of the revised and improved design guidelines, we determine in the quarter that we will not be able to meet the completion deadline as indicated in our contract.
While we continue to engage our clients in regards to execution strategy, we must recognize the cost associated with missing. The initial project completion date and other identified expenses.
Results also include additional charges totaling.
$87 million.
Resulting from schedule, driven cost growth and client and subcontractor negotiations on too.
Fixed price downstream projects as well as scope reductions on a large upstream project.
On a positive note, we want to Reimbursable FC contract for a refinery expansion project in the United Kingdom.
We were also awarded the feet package for any is new processing plant in the United Kingdom, which is a part of their broader strategic investment in the region.
We are excited to be part of these projects.
Regarding our LNG, Canada project.
We're on track with the overall project schedule and budget in the second quarter. We completed the last 30% model reviews and continued site preparation and construction of the Cedar Valley large worker accommodation center.
During the third quarter, we will be progressing engineering, continuing site preparation and commencing construction of the material Offloading facility.
We remain on schedule to release module design packages to our fabrication yard in Q1 of 2020.
Although this project is taken into was taken into backlog at the end of 2018, we have completed additional reviews and can confirm that LNG, Canada conforms to the revised risk criteria, we announced today.
We're also moving forward with the Formosa Sunshine project in Louisiana.
Our team is working on the fee component for several parts of this mega facility.
And continuing to put together proposals for other pieces of the plant.
We expect to see in the second half of 2019, the Reimbursable PC award for the utilities Offsite infrastructures and logistics portion of this project.
We're able to leverage the experience we have in this area to more effectively forecast labor.
And equipment costs.
And finally in SC AMC you have heard us talk about two large methanol projects that we expected to win in 2019.
Unfortunately, one of these project South Louisiana methanol was indefinitely delayed by the client this quarter.
This was disappointing to us and obviously affects our new awards outlook for even see this year.
We expect that the Lake Charles Methanol project will move forward early next year.
Now if we turn to slide nine please.
In the mining industrial infrastructure and power segment results for the quarter include project adjustments of $109 million on three gas fired power projects and $55 million on several infrastructure projects, including the purple line in Maryland.
With regard to the power projects, we have final agreements with our clients where both sides.
Our absolved from future liability other than standard warranty coverage.
Thus we are pleased to say that these projects are finally behind us with no remaining material exposure to gas fired power in our backlog.
You may have seen some news articles about the empty a purple line project in Maryland.
And some challenges our joint venture has faced to keep this project progressing on schedule.
Due to legal and right of way delays, we have revised our project forecast based on increases to our cost forecast.
And changes to the timeline.
We announced this quarter award of a $1.7 billion 635, LBJ East infrastructure project here in Dallas.
This project is license example of our strong relationship latest example of our strong relationship with Texas DLP.
We recently won a $263 million project with North Carolina Department of Transportation.
On Interstate 26 near Ashville.
We expect to book both awards in the third quarter.
In mining, we're starting to see the feed and feasibility work we have been completing over the last year.
Come to fruition.
In the second quarter, we booked over $300 million at work in copper mining projects alone.
Now if you would turn to slide 10.
In the government group results for the quarter included a charge of $233 million for a government project on which the company serves as a subcontractor to a commercial client.
But this commercial client who is providing the PC services for several new structures on an existing site.
The charge, we're taking on the project is substantially driven by late engineering changes and cost growth.
And project change orders that have been rejected.
As a subcontractor on this project, we continue to work with the prime contractor to resolve these matters.
The project is expected to complete at the end of 2020.
In the second quarter, we won a nine month extension to the Logcap for contract in Afghanistan.
We recently announced our 14 month extension of our immuno contract at the Savannah River site in South Carolina.
And we will book our portion of this award in the third quarter.
Also later this year.
We expect to hear about both the tank closure contract and the Central Plateau contract at the Hanford site for the deal.
Now if you would please turn to slide 11.
In diversified services.
Our store restructuring that we announced last quarter is well underway.
And going very well.
Our restructuring will be substantially complete by the end of the year.
This quarter Historic led consortium was awarded a four year framework agreement for plant turnaround services for Echo petrol on two refineries in Colombia.
Now turning to our equipment rental company amico.
We're exiting our operations in Mexico and in selected international countries.
Exiting these low too.
These low to negative margin met markets will result in a restructuring charge of approximately a $120 million with $37 million recognized this quarter.
We expect to receive cash approximately $90 million as a result of this restructuring effort.
And finally, we're evaluating the rest of our organization see what offerings what end markets are not consistent with our goals to drive long term value for our shareholders.
All options on the table and we will tell you. The results of this with you on our September 24th call.
I will now turn the call over to Mike to give some financial updates from the quarter.
Mike.
Thank you Carlos and again welcome to our second quarter Conference call.
Like Alan I returned to floor based on my loyalty to the company.
Along with Alan and Carlos and committed to returning floor to industry leading performance.
Since you can read about our results for the quarter in our earnings release and 10-Q filed this afternoon.
I will focus on several key matters first charges in the quarter.
Please turn to slide 12.
Results for the quarter include $669 million of project charges.
$46 million for ongoing restructuring efforts and diversified services $26 million for pre contract costs and $19 million for the elimination of embedded foreign currency derivatives related to the company's joint venture in Mexico.
As Carlos mentioned and as stated in our earnings release and 10-Q.
These charges are in large part the result of managements efforts to resolve or at least progress a number of project matters during the quarter.
Some matters have been resolved or near resolution.
However, in spite of our extremely diligent efforts to quantify risk this quarter risk remains in our backlog in any additional project challenges could impact future results.
In addition.
The cost of actions to be taken as a result of our ongoing strategic review may also negative negatively impact future quarters. Consequently, we will not be providing guidance for 2019.
Shifting to the balance sheet.
Fluor's cash cash plus marketable securities for the quarter totaled $1.9 billion essentially flat with last quarter.
Available domestic cash balance was approximately 20% of total cash and marketable securities.
Our capital structure remains solid and we have substantial liquidity.
In addition to our cash we have committed lines of credit of 3.5 billion approximately half of which is available for drawings.
We have plenty of room under our Q covenant and the credit agreement and even after the lines are fully drawn.
And even as the lines are fully draw we have plenty of room.
Mature until 2022 further the first significant tranche of our long term debt does not mature until 2023.
However, our credit ratings have declined and we'll certainly come under pressure this quarter.
We are committed to reversing this trend has strengthened floors financial position as Carlo said, we're looking at all options and we'll provide an update on our September 24th call.
Please turn to slide 13.
Our priorities to accomplish this goal our cash flow generation, improving force cost profile and operating efficiency and enhancing our return on investment through focused asset management.
The first is cash flow generation.
Cash flow from operations in the quarter totaled $109 million.
Cash flow from operations for the second half of the year is likely to be negative as it continued to fund the troubled projects that we have discussed today.
Future sources of positive cash flow will be selected asset sales and divestitures, including real estate.
As well as the collection of project receivables change orders and claims.
Moving to the underlying cost profile of our businesses in number of options are being explored as part of the strategic review.
These include optimizing our global real estate footprint.
Improved discipline around overhead expenses and rebalancing staffing levels to meet the evolving demands of our clients.
Please turn to slide 14.
Regards to improving return on investment.
I, along with executive management and the board have been reviewing three major investments that were made over the past few years.
The first is store our own business that we held in diversified services.
Last quarter, the company announced a restructuring of the.
That is still underway and is on track.
These restructuring efforts respond to a shift in the type of some type of services demanded by our clients.
This quarter, we took a restructuring charge of $9 million.
Due to anticipated asset divestitures and severance.
We took a $20 million $27 million restructuring costs last quarter anticipated, taking another 14 million in restructuring costs in the next two quarters.
With these changes we believe the beer business will be appropriately sized and position to further add value for our broader organization.
Next I want to talk about our current joint venture fabrication yard.
We still believe this facility provides flexibility and schedule certainty, we acquired execute large fixed price contracts, most notably LNG Canada.
That being said, we want to make sure that this investment is operated and structured in a manner that allows us to achieve appropriate returns.
The yard currently lacks volume with appropriate mix of work and May continue to be a modest drag on earnings for the balance of 2019.
We have started conversations with our partner on how to best restructure this investment to bring a new work on a profitable basis, while reducing our exposure.
And finally, new scale last week, Nuscale announced that as some of our design had a clear that NRC second and third phases that review six weeks ahead of schedule.
NRC remains on track to complete its review by September 2020, and our first potential customers planning a 12 module as some our plant in Idaho.
Nuscale has also signed and we used to explore the deployment of this technology in a number of countries and discussions are underway with other potential customers.
As you may have seen Tucson, heavy industries and construction along with Sargent Monday has signed agreements to invest in new scale.
These new investors are expected to fund the cash requirements for the balance of 2019.
We are encouraged by this progress and are open to adding additional investors to fund requirements beyond 2019.
Please turn to slide 15.
As I mentioned, we are not providing updated guidance for the second half of 2019. However, there are a couple of cost cost estimates, we can guide to.
These include expected corporate gene the expense of approximately $100 million, excluding restructuring charges and pension settlements both of which are likely to be significant.
No additional funding for new scale in the second half of the year due to the recent and pending new investments.
Do songs Sargent London.
Following Syfy as approval of these investments we will no longer be incurring expenses for the remainder of this year.
Finally, turning to slide 16.
As it relates to our business segments.
When comparing the second half of 2019 to the second half of 2018.
We expect that energy and chemical revenue increased 15% to 20%.
With modest improvement operating profit margins mining industrial infrastructure and power revenue growth of 30% to 40% primarily due to mining with operating profit margins at 2% to 3% range.
Government revenue to decrease by approximately 5%.
Operating profit margins of 3%, excluding new scale and diversified services revenue growth of 8% to 10% with flat margins.
With that operator, we are ready to take questions.
Thank you if you'd like to ask a question on todays call. Please press star one on your telephone keypad.
If you're listening today using a speakerphone. Please pick up your handset before president request body digits. Once again, please press star one at this time to ask the question.
We'll take our first question from Andy Kaplowitz with Citi. Please go ahead.
Good evening guys, Mike welcome back.
Thanks, Thank you.
So Alan I know you said there were clearly if any said there could be more risk in our backlog.
But the street will wonder whether you actually to create that back they're not given the size of the charges. You took obviously dissolving disagreements between sell but could you give us more color.
If you look at your current trend differently and if possible could you give us any examples of how you've read escondida productivity on projects. So we can understand the level of conservatism.
Sure.
Let me just comment on the several events that took place this quarter that resulted in the charge.
For example on the power projects, we were able to reach a settlement agreement with the client.
And as a result of that we are taking a charge of about $109 million and taking some positive and are you seeing some positive cash flow.
With respect to certain estimates of cost to complete on a couple of projects.
Those were looked at this quarter.
Given the I'd say the progress that has been made particularly with respect to engineering, which oftentimes strives with strides other factors such as procurement and.
And materials that need to be acquired and those were re estimated on that basis as far as.
As contract we have a number and as it is common in every project change orders on various projects and we evaluate those product those change orders, we discuss them with the client and we reach conclusions on where we are with respect of the government project. For example, we have a number of change orders that are outstanding and we met with the client and made a judgment as to whether we should.
Take the charge at this time, and we decided that we should it doesn't mean that we're not going to pursue those change orders at a later date, but we thought it was prudent to do so do so at this time.
Another factor that we sometimes look at and obviously with respect to these estimates there is a degree of judgment.
That is exercised and.
And we we.
Tightened the.
The us assumptions a little bit.
And as a result of that.
Perhaps took some charges that.
That are reflected in the in these $714 million of charges this quarter.
Okay. Thanks for that color.
How should we think about floors ability to win new projects non group backlog going forward first of all how favorable do you still think the overall oil and gas and mining markets are at this point.
About some project delays.
Do you still believe that were in the classic upsell and then are you actually in the retrenchment mode.
Excluding sandy and the major potential awards that are out there do you still think you can grow backlog can you see and the mining infrastructure business.
Well.
Couple of things.
Certainly.
We think we are well positioned to win work and.
It's it's no secret that the industry has suffered severely over the last couple of years, given what has happened in shifting of risk from clients to contractors and.
The industry is getting more selective, but we're going to and we're getting more selective as well, but we think we're well positioned to win work.
For example, right now we have a backlog of $35 billion, we expect over the second half of this year for our backlog to grow.
Perhaps to $40 billion and with respect to this backlog growth that we're expecting.
We're very comfortable with the kinds of projects that were signed with it we are expecting to win we are let's assume for example that we are awarded the.
Roma project in Mozambique that that project has gone through a screen filter that consistent and compatible with the new rules of the road that we have established so we're very comfortable with that we also have some other for example, we have some other lump sum project that were.
Pursuing but those are negotiated lump sum so while our.
While our.
Backlog will probably increase a little bit in terms of lump sum it will be.
It will be lump sum that we feel comfortable with.
Mike if I could just squeeze a quick one on cash.
You mentioned cash would be negative in the second half of 19 cash from operations.
You actually have an outflow next year.
Given the project or did you take now.
That's a great question, we do expect modest negative cash outflow. This year as a result of project charges, but we will also be seeing some inflow from our ongoing operations for next year.
There will definitely be some some additional negative outflow from the from the projects.
But we also have our base core business that will be generating cash throughout the year.
And our net cash position next year will to a large extent really depend on our actions based on the strategic review that we are in there that's underway currently.
I certainly expect those those actions plus ongoing cost and cash management activities, where we're really looking at all of our excess real estate. We're looking at other assets that can be liquidated.
A number of things to enhance our cash position. So I would expect overall I'd be very very disappointed if we cannot generate significant amount of amounts of cash in 2020.
Thanks, guys.
You bet.
Well take our next question from Jamie Cook with Credit Suisse. Please go ahead.
Hi, good morning.
Okay, sorry, good evening, a couple of questions one.
Just on the charges that you took on the problem projects is there any way you can help us disclose the dollar amount of backlog, which is associated with the problem projects.
How many are there you highlighted some but there are more in infrastructure. We didnt highlight the number and then what percent complete those projects are to my second question is in terms of how we're thinking about this strategic review.
When you guys were first down the road you talked about cutting investment and restructuring store can you talk to that come back.
You know you talked about new scale, you talked about real estate, but I'm just wondering how extensive this review is now that we have lazard is a strategic advisor to whether we're considering you know brought our broader portfolio changes you know relative to what we announced before given the magnitude and.
Hi, pervasiveness of that charge is that we've seen so I guess and then last.
Like in.
And what world can we get comfortable with LNG, Canada, Canada, given what we've just seen today.
Okay, Jamie Youve asked all the questions that fact that you'd ask let me take let me start.
75% of the charges that we took this quarter relate to two projects the offshore project and the government project as well as the close out of the power projects.
With respect to the infrastructure projects and by the way the power project is about I'm sorry the.
Government project is about 50% complete the offshore project is a little bit.
Higher than that in terms of completion.
With respect to the infrastructure projects the largest charge there is the.
The Purple line project in Maryland, which we discussed in the in the earlier remarks with respect to the rest of the infrastructure charges. They're all small charges that we probably wouldn't have spoken about but for the fact that they all add up total adds up to about $55 million and some of those projects that we've taken small charges are not even in a loss position.
With respect to.
The strategic review that we're engaged in.
As we said everything's on the table.
We are going to be looking at capital structure.
Dividends assets portfolio.
Everything that you can imagine to be in a position to.
Report back on.
On the September 24th call.
Alan you want to add I think no I think thats right Carlos.
Jamie This last three months, we have been incredibly busy working with our.
Business unit lines going through the backlog addressing all of the risk projects.
We have been.
Progressing our position on each of the investments and putting a significant focus on those.
We also have.
Carlos has done a really excellent effort in providing some pretty stringent selectivity criteria and that unfortunate and working through the organizations to make sure that we are we are being much more highly selective in the UN addressing these risks that's taken a tremendous amount of effort this quarter.
But in in respect to the other parts of our portfolio. We have also been assessing that we're not in a position to make any announcement right now that it requires additional work. We're looking is that some efforts that will reduce our overall cost footprint, Mike mentioned some of those.
But I would say September 24th we're going to be able to tell you. What this business what the business portfolio of this company should be.
What what each of them represent and contribute to the total of fluor and which ones that we think we can.
We have to have an optimum situation so.
We don't need to avoid that question at all it's just that we're just not ready to make those decisions yet because of the analysis, that's going on but you should rest assured that we're looking at the entire portfolio.
And then Alan on LNG, Canada, given what you guys have seen so far it's too early.
To possibly get comfortable with that project like how how do I respond to that when investors ask me that.
Yes, LNG, Canada as I mentioned, where it's early in the project still we're still on on schedule and on budget. We brought up a number of X pass to augment our critical activity there.
We have mark fields was there.
Two days or three days after he got appointed head of Vmc, Mike and I have now joined the board of directors of that joint venture. We are dedicating all of our resources to that project and at this point.
We believe that that project has would would pass our new.
Pursued pursuit requirements that we've implemented now so at this point.
We're comfortable with that project.
All right ill, let someone get in there. Thank you.
Thank you Evan.
Well take our next question from Steven Fisher with UBS. Please go ahead.
Great. Thanks, good evening.
Given the.
Hi, guys given the breadth of everything you had to accomplish.
Do you think that.
Two to three months.
It was enough time to really do everything that you needed to do specifically on the backlog reviews.
It was it has absolutely throws it as it could be or did you have to kind of Russia.
At all so that's going to be prepared for today.
Yes, Steve they did work their chairman extremely hard.
I can assure you Steve.
Product project that we have touched we have gone thoroughly deeply.
And that's not to say that we won't be doing that for the next several quarters or two upon project completion and thats not to say as we as you know we can't say that.
Everything is done on each of these projects, but we have.
At this point, we're very comfortable with where we are based on the information. We have now now some of these but there is one project that where the engineering has cost is too.
Have to increase our cost forecast and that engineering is not complete I don't expected. It I mean, I can't say that it's going to have additional charges, but until the engineering is complete.
There is always a possible possibility of that but.
We have we have worked long and hard the last three months.
We.
We've talked to clients, we visited the project sites, we've talked to our project people. It is banned and all out effort.
Steve You haven't let me give you example of our efforts in my prior life at quarter end I would have one review with all the groups Cfos and go through the numbers and make sure you're comfortable.
This over the last two months, we have three rounds reviews with all the group controllers and Cfos, we brought them in we sat down for long periods of time on three different occasions to make sure that that we and they were comfortable.
With the accounting and assessment of risk this quarter.
That was.
As Carl said it is very intense effort.
Okay and wondering if you can help us understand the likely path of margins from here, particularly in the NC business because that's the one if you look at.
The guidance that you have for the second half of this year.
Relative to what maybe we should think would be normalized has perhaps the most room for upside so.
I really kind of wondering how all this effects 2020 and.
Yes, we should we expect as we get into the first quarter and the first half of 2020 that that we should see still a step up significantly in margins as you execute the LNG Canada project then.
Get through some of the other things that are dragging on the margins.
As you look through the remainder of this year and 2020 up obviously, the one offshore project will be a drag on margins, but the.
The rest of the business, we should expect a modest and improved improvement in margins. This year and that will continue into 2020.
As we see for the rest of the business through the backlog and comfort.
But on on the CE business I mean does that mean can we get back to like a 5% to 6% margin in 2020 or is that off the table at this point.
I think it's going to take a little longer to get back to that level of margins I think we'll see modest improvement this year and a modest improvement next year.
Got it all right. Thanks a lot.
And we'll take our next question from Tahira Afzal with Keybanc capital markets. Please go ahead.
Good evening folks.
That's a good evening.
So I guess, that's the first question you know you've got some interesting Bob knows no on Nuscale both of them have a nuclear capabilities as well as expertise strategically do you know if you look out where do you see their old potentially going with yourselves.
Well sure.
First of all we're very pleased that we've gotten in investment that's going to eliminate any funding obligation.
I'm sure for the balance of this year, maybe into the beginning of next years once we get serious approval, but we have noticed a significant increase in investor interest in a new skills and we are pursuing discussions with other investors curved so.
The fact that we've gone through a two recent.
Great reviews, with NRC and we have passed them in we're expecting NRC approval I believe it's like 2020.
Makes us gives us a lot of confidence that we'll be able to attract investors in the next six months to a year.
Alright, Thank you and I know and I know a lot of these same barton milestones.
Medina technology are getting lost in all the noise stuff. So you know, obviously, you're going to see that for yourself.
I guess the second question from me you know there have been several other construction companies that are facing and struggling bad productivity issues and cost provisions and some of them have been pretty vocal that they're trying to get a some resources from Canada. I guess my concern is even though you're doing more modular construction for LNG, Canada are you being very watchful on shoring up all the expertise you need on ground.
Absolutely that's one of the things that.
Marcus.
Enhanced even since he took over and he is bringing resources to that project from a other locations to enhance our capabilities there.
Got it thank you.
And well take our next question from Michael Dudas with vertical research. Please go ahead.
Good evening, everybody and appreciate all the frankness in the openness you've shared with US This evening.
Thanks, Mike Thank you.
For I guess, Alan and Carlos.
Well one of the common themes that you learn from your discussions with the client base.
With your management's with the employees with vendors.
That surprise you or got you to this point of law. We got you know stupid not Houston, but Dallas, we have a problem other than obviously the issues that we reported today in the second quarter.
Mike one of the things that we've done is Carlson I've met with a lot of the Ceos of our clients.
And it's an interesting.
It's an interesting situation, where they understand the issues that are occurring in our industry. They see the the damage has been done to the sector and they are they actually talked pretty openly about the need for a win win situation and trying to correct that balance.
I will tell you, though and one of the things that we've had in our discussion just pointed out to them that hasn't always flow down through their supply chain.
Oh I'm sure that doesn't surprise, you, but we still and I've had two conversations just in the last week, where I've gone back up the chain and talked to the top of the other company about the that misdirection or that I Miss misalignment.
In the in the risk review, so we're going to push on that I think is floor, we can be selective.
And I think the way it was not only can we be selective.
<unk> as you've noticed all of the other announcements in this industry. There are actually people, leaving it there are people that are that are curtailing their their selectivity criteria as well I actually think thats. Good for us if we can be discipline.
And we can be selective I actually think that it creates a better situation for us going forward, but we do have to be disciplined I'll, let carlos address that.
For your question, let me, let me comment on what has happened internally within the company.
In the last couple of weeks for example, we have.
A decision not to bid projects that we probably would have been had previously.
We have also changed our bids on a couple of projects to be.
Noncompliant, but on a basis that we believe we can execute.
Effectively.
And we have.
We have established we're establishing a new discipline in this regard we're not going to take projects, where we are going to be bidding against a number of other.
Competitors and the and we don't have a quantifiable advantage and even when we have a quantifiable advantage, it's going to be when there is a very limited slate of competitors. So this is a change that's that's quickly quickly being up.
That's resonating throughout the company and every every risk project comes to me for approval at long with my management team and everybody is onboard with that.
[laughter] I appreciate that.
Those thoughts and I guess Alan to your point on the Ceos of the clients and the customer base.
Is this a secular I mean, this and cyclicality in risk mitigate risk transfer from contracted or client over the cycle, but as this somehow more secular some other something else being driven by this or will it be cyclical when let more people pull out of the business and types of capacity and then it will be a better situation and how this floor is the size of the company and where you're focused on today can be most effective for that to generate returns that's going to be required to improve your share price.
All right. That's a that's an excellent question. This really started actually I saw it from the other side.
When I was on the board of an oil gas company.
When the when the oil price drop so precipitously several years ago, that's when the oil all of the oil companies moved strongly to cut their costs.
And one of the first place as they did that was with their suppliers and contractors I think thats. The that was the start of the initiative and it's just continued sensor in fact, the has brought in consultants and so forth to work with their supply chain to continue to perfect that.
I do believe that the the changes now that are occurring in the industry. The problems that are that have occurred.
Has has woken these companies and we've we've seen a realization of it I do believe the what we're going to do it and our actions will actually help drive some momentum in that regard because but other companies are joining us quite frankly, but I think we can lead that effort with our brand and with our global reach and we intend to do that.
Thanks Al Thank you Carlos.
And we'll take our next question from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, good afternoon, and good evening everyone.
That's all right.
Carlson I'm wondering if you could talk about where are you folks drew the line in the sand in terms of projects that you're monitoring, but then take charges on the you know for example projects like Tappan Zee, where there's dispute with with the owners and the projects like that just can you help us build a comfort level that you.
Darren another.
Number of projects that were monitoring that didn't meet the threshold, where we took charges that.
Where its possible going forward.
[noise], Yeah sure Ajay.
First of all on Tappan Zee, everybody, who took a small charge. This this quarter.
We have a.
And we do have a a dispute with declining claim there, which we have a legal basis to do to pursue so where we have where we have a high level of confidence and comfort Jerry we will.
We will not take a charge, but in this case.
We don't have very many other projects, where we have.
Claims that.
We believe our at risk.
So.
As I said earlier, we took a very hard look and.
Within the range of reasonableness, we got a little bit more conservative.
Okay, and then in terms of.
The charges that we saw this quarter what are the cash payments that are going to be necessary, where they go along with those charges or have a substantial portion of them effectively already been paid for via working capital growth can you help us understand that.
Hi, there there are substantial future cash payments or from some of the charges.
Oh, probably in the $2 million to $300 million range.
Further for this year and into the first part of next year.
But again, we will have cash flow from our the rest of our operations offset a good portion of that.
But there are some charges associated with projects that will actually result in positive cash flow.
The the Duke power is an example, where we took some charges we expect to receive cash from the client the restructuring activities further any color Mexico and the Caribbean, We took some restructuring charges, but as we liquidate those assets will have positive cash flow. So so I'll not all the actions that we took a will result in negative cash flow somewhere resulting in positive cash flow in the future.
Okay and as we look at the implied earnings range of the back half margin commentary that you folks laid out you know that implies.
Earnings run rate in the low $2 range as we think about heading into the strategic review discussion then in two months I would assume that that's the starting point for the earnings power of the business and then we'll look at strategic options from there is that the right starting point or would would you make any observations relative to where we are going to be exiting the year.
Giving all that given all the moving parts this quarter plus the next two quarters as we go through our strategic review I really I don't think is wise for us to do.
To give guidance relative though starting point I think we need to fit that go through our strategic review and go through our fall assessment of 2020 and get more comfortable lives as we complete this year and to be giving giving guidance as a starting point for looking at next year.
Okay.
I appreciate the discussion thanks.
Hi, Jerry.
Well take our next question from Chad Dillard with Deutsche Bank. Please go ahead.
Hi, good evening everyone.
Yes.
So can you talk about your commitment to the integrated delivery model and how this could potentially change on then if are there any projects that you took charge that were a bit under that model.
And then secondly, with your your new risk framework like how does your your prospect list change.
What was it before the new framework was implemented what's it look like today.
Well, let me answer the second question first our prospect list I really doesn't change that much one of the areas, where we expect our prospects to materialize and we mentioned in the a and the earlier remarks is in mining for example, where almost all the work is reimbursable and with respect I mentioned earlier with respect to the next six quarters or so we have prospects that are.
But between 12 and $13 billion of.
Lump sum work, but to two thirds of that.
Uh-huh prospect list or the value of the prospects.
Our either negotiated lumpsum services or the.
The Mozambique project, which as we mentioned earlier passes all of our tests in terms of project pursuits.
And remind me what was the first part of your question.
Yeah, sorry, just I was just curious about your commitment to the integrated delivery model.
How could change and were there any projects.
That took charges this quarter bit under that model.
[noise] you know we have the integrates a delivery model is something that we're going to continue to have.
And have available to us, but to the extent that any of our that our strategic review results in some changes in how we handle our investments in that might change, but but we are that's a capability that we have that we're going to continue to to offer but we're not necessarily going to be limited to that to the extent that we can offer a parts of that delivery model because the clients want that we're prepared to do that we're not going to walk away from a different offerings.
Got it.
And so I'll take the $670 million of charges I guess like how much revenue does that represent and how much is still profitable.
That that represents.
Single digit revenue less than 10%.
As Uh huh.
As we look forward for that company.
Amount that's profitable is.
There's a modest amount given where you are in those projects, it's very modest.
They were profitable projects and infrastructure as Carlos mentioned, where we took charges on and there were a couple of other.
One off projects that require a whole where we reduced profitability going forward, but it's those projects I think Jamie asked a question earlier and they don't wish that represent a large proportion of our revenue or backlog.
Got you if I can just squeeze one last one then.
Just with regard to your analysis, LNG, Canada, meaning kind of like your requirements.
That probably is that predicated on owning our equity ownership in your fab.
Well, that's that's certainly a part of the de risking of that project that we have our modules being built it they have occasion yard in China. So that's definitely part of it yes.
Thank you.
And we do have time for one more question, we'll take our last question from Andy Wittmann with Baird. Please go ahead.
Great. Thanks for taking my question here I guess my question is.
Building on some of the cash and balance sheet questions and would probably be appropriate for Mike.
I just I just looking at.
The contract to assets under contract liabilities that you reported here your your assets are down sequentially.
And your liabilities are up significantly from the the charges that you took.
We're now in a position for the first time, where your contract pass through your contract liabilities are actually in excess of your contract assets.
So typically the other way to the tune of about 600, or seven don't know $100 million to the positive on assets. So it can we is there anything.
Can we use this relationship between contract liabilities and contract assets to forecast what your potential cash burn could be you suggested that the second half the year confirmed two or $300 million in the third still be some burn into 2020, I mean are we looking here at seven $800 million of cash burn as we move into 2020 on these projects that have the negative contract capital position.
Oh, that's a little high.
The cash burn will be a a portion of the losses. We took were not all those losses do not represent a cash burn some are for cash that's already been spent that was.
Oh unapproved change orders things like that that we took off for books worries with respect to the cash, but just don't don't expect a collection on the revenue side.
No we didn't give out specific numbers, but some of that some of the charges.
Relate to the cost growth and <expletive> on the Costco side, we will probably see cash outflow on the revenue side, where we expect less revenue income weve already already expensed cash I mean, once you got to <unk> it'll be it'll be a portion it'll it'll certainly be more than half and will be the full amount of those charges.
Okay. That's helpful. And then I guess just in in in the <unk> in the case of cash burn happening here would you look to fund that off of your revolver or would you could start considering repatriating some of the former foreign domiciled cash and if you did what would the tax implications of that be.
That's one of the options that's on the table.
Given that the cash that we can have on hand domestically and our ability to.
To repatriate foreign cash over time, and we have a we have a lot of other.
Actions that I mentioned, where do you know where you're starting right away selling some excess real estate we're gonna.
Actually be cashing in seven insurance policy, if we're doing a lot of things it to generate cash.
I expected everything again, so we're not going to be funding any of our cash requirements off the revolver.
Okay Evan.
But that that's our last option.
Got it.
Okay. That's all my questions. Thank you.
And 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.
Well, we still have a lot of work to do at floor. We ask for your patience as we ensure we are taking the right steps.
We maintain our conviction that floor is best in class company and our remaining diligent in our pursuit to restore our reputation and credibility.
Our priority going forward is to pursue Wayne and profitably deliver on work that is aligned with floors risk profile engineering and project management capability.
We look forward to providing additional information on September 24th as it pertains to our strategic review and our process regarding portfolio rationalization.
Great I appreciate your support a floor.
Thank you.
Once again that does conclude today's conference. Thank you for your participation you may now disconnect your phone lines.