Fluor Corporation

Good morning, and welcome to Floor's third quarter 2025 earnings conference call. Today's call is being recorded. At this time, all participants are in a 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 10.30 a.m. Eastern time today, accessible on Floor's website at investor.floor.com. The web replay will be available for 30 days. A telephone replay will also be available for seven days through a registration link, also accessible on Floor's website at investor.floor.com. At this time for opening remarks, I would like to turn the call over to Jason Landkamer, Vice President, Investor Relations. Please go ahead, Mr. Landkamer.

Thanks, Ian. Good morning, everyone, and welcome to FLOR's 2025 third quarter earnings call. Jim Brewer, FLOR's chief executive officer, and John Regan, FLOR's chief financial officer, are both with us today. FLOR issued its third quarter earnings release earlier this morning, and a slide presentation is posted on our website that we will reference while making prepared remarks. Before getting started, I would like to refer you to our safe harbor note regarding forward-looking statements, which are summarized on slide two. During today's presentation, we will be making forward-looking statements to 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 our 2024 Form 10-K and our Form 10-Q, which was filed earlier today. During the call, we will discuss certain non-GAAP financial measures. Reconciliations of these amounts to the comparable GAAP measures are reflected in our earnings release and posted in the investor relations section of our website at investor.floor.com. With that, I'll now turn the call over to Jim Brewer, Floor's CEO. Jim?

Thank you, Jason, and good morning, everyone. Thank you for joining us today. To start, I'd like to comment on our very successful long-term investment in NuScale. I'm pleased to say that we've reached a major milestone with this investment. since we pivoted earlier this year away from a strategic investor to a market-focused solution. Working with NuScale's management and board, we announced yesterday the conversion of our remaining investment into Class A shares. We will begin monetizing these shares in an orderly way starting next week and expect to complete this process in the second quarter of 2026. This accomplishment is a result of negotiations with NuScale over the past several quarters. Our monetization plan ensures we can have line of sight to deliver the significant value of this investment to Fluor shareholders, while also considering NuScale's own capital raising needs. John will provide details about Fluor's capital allocation plans in a moment. Furthermore, This milestone accelerates our broader strategic journey, where we have moved successfully to an asset-light model with a majority reimbursable backlog, creating a strong foundation to fuel long-term growth. Now, let's turn to our operating review, beginning on slide four. Revenue for the third quarter was $3.4 billion, which includes a $653 million revenue reversal, and energy solutions related to the Santos litigation. Consolidated new awards for the third quarter were $3.3 billion and 99% reimbursable. In addition to these awards, we recognized nearly $800 million in positive backlog adjustments, which keeps our total backlog around $28 billion, of which 82% is reimbursable. Moving to our business segments, please turn to slide six. Urban Solutions reported profit of $61 million in the third quarter. Results in this segment reflect a ramp up of recently awarded projects in ATLS and in mining and metals. New awards for the quarter total $1.8 billion, a significant increase from $828 million in the same period last year. Awards for the quarter included incremental bookings for two projects, a copper mining project in Canada and a life sciences project in the United States. We were also awarded a front-end engineering and design services contract for MP Materials as they built a new rare earth magnet manufacturing facility in Texas. These awards reflect our exposure to growth markets. and highlight our leadership and professional and technical solutions supported by our global engineering and construction expertise. Ending backlog now at $20.5 billion represents 73% of Fluor's total backlog. Now please turn to slide seven. In infrastructure, we continue to make solid progress on the four remaining loss projects. At Gordie Howe, we anticipate completing all construction required to open for traffic in Q4 or early next year. On the LAX people mover, construction activities will be largely complete and positioned for operation in early 26. The 635 LBJ project will reach substantial completion in Q2 of 2026. And on the I-35E Phase II project, most of the major construction activities will be nearing completion in late 26. on many of these projects we continue to pursue cost recoveries and change orders from clients and subcontractors while we ultimately expect to be successful in these recoveries in many cases these efforts materialize on an extended timeline one proof point for this is a favorable negotiation result in the third quarter on an infrastructure project that we completed in 2019. Please turn to slide eight. For the next few quarters, we remain very excited about the opportunities in the urban solution space. In mining and metals, we continue to engage clients developing copper, rare earth and critical minerals, as well as aluminum and green steel. In life sciences, we anticipate a Q4 award for a pharmaceutical facility with a new client. In data centers, we're looking to translate our success in India and in Europe to North America. While many clients are asking for terms and conditions that don't align with our pursuit principles, we are confident in the value that we provide for the more complex programs, including hyperscalers. Moving to energy solutions, please turn to slide nine. For the quarter, energy solutions reported a segment loss of $533 million compared to a profit of $50 million a year ago. Results reflect a $653 million court ruling that we had previously announced in August. This was on the long-completed reimbursable Santos project in Australia. John will provide further details in his comments. New awards and energy for the quarter totaled $222 million, mostly in services. If you'll recall last quarter, we re-baselined our full year expectations for our joint venture in Mexico and slowed down our execution activities pending payment from a client. I am pleased to report that the client has made significant payments during the quarter, and again in October. This enabled us to begin a controlled ramp up of our execution activities. Turning to slide 10. Last week at LOG Canada, we achieved RFSU on train two, and all systems have been handed over to the client. Our team is now focused on the remaining punch list items. This marks our final progress update. I want to congratulate the entire team and all workers for their dedication and hard work. This project will be remembered as one of the largest and most complex projects in Fluor's history, and its success is a testament to our global capabilities, even in remote or difficult locations. Our work with the client continues as we update the fee package and estimate for a potential Phase II expansion. Please turn to slide 11. Trade and policy uncertainty, oversupply of chemicals, and defunding of energy transition have caused delays in our clients' FIDs and have impacted 2025 new awards. We're staying close to our clients by performing front-end work and remain encouraged by their commitment to traditional oil and gas. Most new awards in 2026 will be weighted towards the second half of the year. Now, with regards to growth opportunities, we're accelerating our efforts in the power market given the increased need for power generation. Currently, we're active on the Rowe Power and Chernivota projects in Romania. We're also executing a gas-fueled power plant in Indonesia and pursuing a number of opportunities in the U.S. and internationally, particularly where we have an operational footprint. We're also tracking short-term mid-size opportunities in chemicals and in upstream. Moving on to slide 12. Mission Solutions reported a segment profit of $34 million for the third quarter, compared to $45 million a year ago. During the quarter, Mission Solutions continued to deliver solid performance across its portfolio projects. However, third quarter results reflect allowances for certain questions and disputed costs on a defense support project. This was mostly offset by additional revenue recognizing connection with a favorable judgment on a long completed weapons project. New awards total 1.3 billion compared to 274 million a year ago. This includes a 1.1 billion six year contract for the DOE, which extends our presence on the Portsmouth project in Ohio. We also received a final extension for work at the Strategic Petroleum Reserve, and were also awarded a position under a contract for the Defense Threat Reduction Agency. This award provides the opportunity to compete for task orders with a combined value of up to $3.5 billion over 10 years. On our project at Tinian Island, the stop work order has lifted, and we are ramping up operations. As we look ahead to the fourth quarter and the first part of 2026, prospects include work on a strategic range services contract for the Air Force, additional work to support the intelligence community and work for the National Cancer Institute. We also anticipate hearing on a small but strategic AUKUS related award with our partner in Australia. On the nuclear enrichment front, Fleur is well positioned on four prospects. We anticipate that over the next two quarters, DOE will announce grant awards to allow our clients to effectively move forward. The above opportunities and Fleur's current portfolio of projects could shift based on any further impacts related to the government shutdown. Before I turn the call over to John, I want to provide an update on the business environment and how that aligns with our four-year strategic plan. Please turn to slide 13. During our strategic update in April, we set clear targets for the management team to achieve throughout the grow and execute phase of our strategy. So far, in 2025, we have strengthened financial discipline, making significant progress in maintaining a robust capital structure while returning substantial capital to shareholders. This has been supported by our core business performance and will be enhanced by the monetization of NuScale. We have continued to pursue fair and balanced contract terms with a majority reimbursable backlog. And when we take on fixed price projects, We do so in areas where we have a distinct competitive advantage and without overburdening our backlog mix. And we have remained focused on project delivery, consistently executing at or above the as-sold gross margin. Now, while we're pleased with our strategic progress, external factors resulted in award delays, which means that our backlog remains level at $28 billion. These delays have put pressure on our EBITDA growth rate. We still anticipate approaching 90 billion in new awards over the four-year planning cycle ended in 2028. But most of these awards will be concentrated in 2026 to 2028, with EBIT from these contracts coming in in 2027 to 2029. Based on our current discussions with clients, These deferrals and cancellations are causing a roughly four-quarter shift in EBIT delivery. To mitigate this, we've accelerated our plans to lean into markets where we can capture opportunities on a short to medium term. This includes deploying additional teams into mining and metals, power, advanced technologies, and LNG. As a leading EPC firm, we are one of a few with high demand capabilities that include project execution leadership, complex engineering acumen, robust supply chain, and construction expertise. We can deliver projects that support global GDP growth and are confident in our ability to win work that meets our pursuit criteria. We see tremendous potential in our end markets, and with an asset-light model and a flexible workforce, We intend to take advantage of our ability to pivot our key execution resources across the organization into areas where we have a clear and distinct advantage. With that, let me now turn the call over to John for the financial update. John? Thanks, Jim, and good morning, everyone. Today, I'll be going over third quarter results and sharing our view on financial guidance for the full year. plus details on our ongoing capital allocation plan. Please turn to slide 15. Our GAAP results notably reflect four items. One, the $653 million charge related to Santos, which because it's customer-related, was recorded as a reduction to revenue in establishing the liability. Two, a $400 million mark-to-market loss related to our investment in NuScale. but with a related tax benefit of $230 million, more on the tax effects later. Three, a net charge of 13 million for additional infrastructure items. And four, anomalous tax outcomes wherein the Santos charge was not tax benefited, but the new scale conversion yielded $125 million release of valuation allowances with no corresponding book income. For Q3, our 10Q reflects a consolidated segment loss of $439 million, impacted by many of those same enumerated items. When you remove the effects of the charge for Santos, results for the quarter trended well above our expectations. Adjusted EBITDA for Q3 was $161 million, compared to 124 million a year ago. Our adjusted EPS of 68 cents compares to 51 cents in 2024. Adjusted results exclude the mark-to-market effect of our investment in NuScale, the charge for the Santos legal ruling, customary FX impacts, and notably for this quarter, the favorable judgments and settlements on two long-completed projects. G&A for the quarter was 43 million, up from 37 reported a year ago. Results actually reflected a reduction of G&A year over year when you set aside 12 million in restructuring costs included in the 25 figures. Some of that is the result of our share price reducing from 52 to 41 during the quarter and the related impact on stock-based comp. Net interest income in Q3 was slightly lower than last quarter at 13 million and compares to 37 million a year ago. This reduction results from less cash on hand at a large JV project nearing handover and to a lesser extent by lower prevailing interest rates. Moving to slide 16, as Jim mentioned, we've seen market improvement from last quarter in Mexico. where we scaled down execution activities for much of Q2 in the face of liquidity constraints related to unpaid AR. Since then, we've seen significant cash receipts, including JV level collections of $800 million in Q3, plus 300 million more in October. On a consolidated basis, we ended the quarter with $2.8 billion of cash and marketable securities up half a billion from June 30th. This included over $400 million in net proceeds from new-scale shares sold during the quarter. Not reflected in our Q3 numbers were an additional $190 million in new-scale proceeds from October. This initial $15 million share conversion and sale created no meaningful cash tax liability due to the tax attributes we've talked about over the last several quarters. After this conversion, we have consumed most but not all of the attributes that we began the quarter with. That means the upcoming conversion will have the same but not complete tax shielding. As guided, operating cash flow for the quarter was strong at $286 million. This was driven by reduced working capital on several large projects as well as distributions from a large energy solutions joint venture. Because our JV in Mexico is recognized under the equity method, the robust collections there have not yet impacted our balance sheet cash or our operating cash flow results. For the fourth quarter, we expect to send payment to Santos to enable the appeal process, as is customary in Australia. The estimated payment will include several items which we can only currently estimate, including contributions from our insurance providers, interest on the ruling, and legal fees. We continue to make progress with our carriers regarding their financial support for both the appeal payment and for the legal costs associated with the appeal. We'll update the markets once we finalize this and remit the funds. As an update on our legacy projects, in Q3, we provided $73 million in funding, half of which came through operating cash flow and with the remainder reflected as an investing activity. For the fourth quarter, we expect legacy funding to be in the $70 million range, 20% coming from operating cash flow. And for 2026, we anticipate around $140 million with 50% of that coming from operating cash flow. I'd also like to point out that projects in a lost position represented $642 million of our total backlog, down $200 million from last quarter, reflecting our continued march to completion for these projects. Please turn to slide 17. On the capital allocation front, we bought back 1.4 million shares in Q3, spending $70 million to do so. Since last December, we've cut our outstandings by over 11 million shares. We modified the pace of the repo in Q3 when we believed a judgment on the Santos case could occur imminently and in our desire to preserve capital for that potential event. Last quarter, we lowered our full share repurchase plan in consideration of our concerns around operating cash flow. Since then, cash flow generation has improved, And we've monetized the initial conversion of SMR. We now see a path to target an additional $800 million in repurchases through the end of February. That would put us on pace for total share repurchases of $1.3 billion over the 15-month period beginning December 2024. We see this $800 million as a great addition to our existing repurchase programs. and expect to announce additional capital allocation programs next year with the clarity of the proceeds from the upcoming conversion. Moreover, this deployment should be a clear signal of the confidence we have in our strategy and the operating ability we have to execute against it. Regarding our new scale investment, I want to reiterate that our conversion happens in November and funds from the sale of these shares are partially tax shielded. Monetization should begin next week. Moving to slide 18 in the outlook. Based on the results from this quarter, we are increasing our 25 adjusted EBITDA guidance to $510 to $540 million, and our adjusted EPS guidance to $2.10 to $2.25. Our guidance like many of our competitors, doesn't assume that the government shutdown ends relatively soon. Our expectations for operating cash flow increased, and we now expect 250 to 300 million generated for the full year, excluding the anticipated payment to Santos. Key assumptions and expectations for Cal 25 are shown on the slide, but include a new awards outlook of $13 billion, and revenue roughly flat with 2024 when excluding the Santos effect. Our expectations for segment margins in Cal 25 are approximately 2.5% for urban solutions, approximately 6% for energy solutions when excluding the Santos effect, and approximately 4.5% for mission solutions. With respect to income taxes, In Q4, we hope to find a better outcome on deductibility for the Santos ruling. Moreover, we note that our income tax rate for the balance of 2025 will hinge significantly on the taxes arising from the conversion of our new scale shares later this week. We generally expect to fully utilize the remaining tax attributes to shield some of that step up. We, of course, would have tax effects for the gain or loss on sale that could have could arise after conversion. While we are not prepared to give detailed guidance for 2026, I do want to echo Jim's comments that the ongoing market conditions have had a meaningful impact on our ability to capture new awards and earnings in the short to medium term. Early indications would suggest EBITDA generation will be marginally better than our guide for full year 2025. In February, we'll provide more perspective for full year 2026 after we finalize the operating plan. And with that, Ian, we're now ready to field our first question.