Fluor, the Texas-based engineering and construction giant trying to reverse its worsening financial condition, said this week it will sell off its government contracting business that includes all its work for the Department of Energy.
Long a major player in government services, the laboring Fluor now sees the business as a valuable property that can be moved in the near term to improve the company’s balance sheet. Chief Executive Officer Carlos Hernandez expects the company to complete a sale sometime in 2020.
Management announced the planned 2020 divestiture during a conference call with investors, following a strategic review the company launched in May. That review followed a CEO shuffle completed amid troubling quarterly financial results and a tumbling stock price. Asked if the government line has received much buyer interest, Fluor executives said the divestiture plan is just being announced.
Hernandez suggested management does not see as much long-term upside in government work as it does for the four business lines it will keep, the smallest of which has a $25 billion “total addressable market” between 2020 and 2022, according to a presentation that accompanied Tuesday’s conference call.
Including joint ventures, Fluor’s government sector has more than 28,000 employees and more than 40 current projects, including DOE work in Idaho, South Carolina, New Mexico, and elsewhere. The company had only recently won its way onto the new management and operations team for Los Alamos National Security as one of two major industry subcontractors. The company then appeared to have cinched a key role in bringing the lab’s pit production mission online by the middle of next decade.
While the sell-off was not a major surprise, telegraphed for months in the company’s ailing stock and the subject of ceaseless gossip in Washington, companies in the Energy Department nuclear cleanup sector are still trying to gauge its impact.
“Nobody really knows what it means,” and people are basically “shrugging their shoulders,” a principal with a DOE subcontractor said by telephone Wednesday.
“The plan to divest the government business does not change how we operate,” Fluor spokesman Brian Mershon said by email Friday. “It is business as usual.”
Fluor is a member or leader of multiple teams working DOE defense-nuclear sites past and present. The company has a major role throughout the National Nuclear Security Administration’s (NNSA) nuclear enterprise, and the Cold War weapons complex now being cleaned up by DOE’s Environmental Management office.
This work is part of contracts held by:
- Triad National Security, the non-profit triumverate of Battelle, the University of California, and Texas A&M University. Fluor is one of two industry subcontractors on the team, which in November took over management and operation of the Los Alamos National Laboratory. The company’s contract with the National Nuclear Security Administration is worth just over $20 billion over 10 years, with options. The deal has a five-year base period.
- Savannah River Nuclear Solutions, the management and operations contractor for the Savannah River Site. Fluor leads the team, which staffs the National Nuclear Security Administration’s tritium facilities at the Aiken, S.C. site. DOE’s Environmental Managment office in July said it is issuing a 14-month extension to take the contract through at least September 2020. The extension includes a pair of one-year options that could keep SRNS on through September 2022. The total value of the SRNS business is estimated at nearly $15 billion since August 2008.
- Fluor Marine Propulsion, which in 2018 wrested management of the National Nuclear Security Administration’s Naval Nuclear Laboratories contract from Bechtel. The contract was a whopper, worth up to $30 billion over 10 years, with options. The deal covers management and operations of the Bettis and Knolls Atomic Power Laboratories in West Mifflin, Pa.; the Kenneth A. Kesselring Site in West Milton, N.Y.; and the Naval Reactors Facility near Idaho Falls, Idaho.
- Fluor Idaho, which has a five-year, $1.6 billion pact that runs through May 2021, for remediation at Idaho National Laboratory supervised by the Environmental Management office.
- Atkins-led Mid-America Conversion Services, which has a five-year, $457 million Environmental Management contract for depleted uranium hexafluoride (DUF6) conversion at the Portsmouth Site in Ohio and the Paducah Site in Kentucky. The deal extends through January 2022. Fluor is a minority partner.
- Four Rivers Nuclear Partnership, the Jacobs-led holder of a potential 10-year, $1.5 billion deactivation and remediation contract at the Environmental Management office’s Paducah Site. The partnership is still in the five-year base period of the award, which with options could extend through June 2022. Fluor is a junior partner.
- Fluor-BWXT Portsmouth, which is in the final 30-month option period of the partnership’s 10-year, $3.4 billion remediation contract, which runs through March 2021 at the Portsmouth Site in Ohio: the former uranium enrichment site now being cleaned up by the Environmental Management office.
International financial advisory firm Lazard helped Fluor analyze its business lines and plan to return to growth. In addition to selling some businesses and real estate, realigning regional offices, and focusing on risk reduction, Fluor will stay in markets where it sees itself as the No. 1 or No. 2 player.
Investors did not immediately reward Fluor’s planned exodus from government contracting. The company’s stock at market close Thursday was at $18.29 per share, down from almost $21 on Thursday, Sept. 19. A year ago, the stock was at more than $58. Its 52-week low, recorded in August, was $16.25.
Revenue for Fluor’s government services during the second quarter of 2019 was $612 million, a steep drop from $868 million a year earlier. Government services suffered a $226 million loss during the quarter, after posting a $27 million profit during the same period in 2018.
News of the planned divestitures comes less than two months after Hernandez said all options were on the table following Fluor’s $555 million loss in the second quarter.
The company will cut its quarterly dividend from $0.21 per share to $0.10 per share, which should cut its annual dividend spending from roughly $120 million to $60 million.
As for potential buyers, speculation in weeks prior to the announcement focused on Jacobs. But a source with another big DOE contractor thinks Jacobs might have passed up buying the Fluor portfolio. A more likely buyer would be an investment house or venture capital firm, which might then spin off portions of the Fluor government portfolio it does not want, he said.
“Absolutely no one was surprised” by the Fluor plans, a third industry source said Thursday. Given the earlier Jacobs speculation, the industry contractor suspects the seller hopes to stimulate a bidding war through a publicly announced sale.
AECOM and SNC-Lavalin would normally be logical suitors for the Fluor unit, but they might sit this one out, according to the third industry source. AECOM unveiled plans in June to spin off its own federal contracting branch into a stand-alone business. SNC-Lavalin, the Montreal-based engineering specialist, is the target of a long-running corruption probe, which makes such a major acquisition unlikely. Paris-based waste management company Veolia might look at Fluor’s government group, but it has not previously made a purchase of that size in North America, the source said Thursday by phone.
Those companies either declined to comment this week or did not reply by deadline for Nuclear Security & Deterrence Monitor.
Meanwhile, Fluor also announced Tuesday that Peter Fluor, the company’s current lead independent director, will leave the board of the company that bears his family name. He will not stand for re-election at the 2020 annual meeting of stockholders, Fluor said in a separate press release.
