A Slimmer, Trimmer Fluor

When James Stein briefed Fluor Corp. employees earlier this month on plans to slash $100 million at one of the world’s biggest engineering and construction companies, it didn’t take long before the issue of executive bonuses came up.

In a message rarely heard at Fluor, Stein warned that those bonuses probably will be a lot smaller this year.

Fluor rewards its executives for performance. And performance has fallen considerably, at least by Fluor standards. Stein and other top executives have acknowledged that the company will not meet the financial goal that it sets each year--a 15% earnings increase.

The slowdown follows a three-year growth spurt that thrilled investors and employees alike as Fluor increased profits by 61% and increased sales by 41%.

That growth, though, was accompanied by soaring operating costs that have begun eating into profits, company officials say. Additionally, Fluor’s first-quarter profit was affected by cost overruns in two of its power plant projects.

The problems are centered in the company’s Fluor Daniel engineering and construction subsidiary, which last year accounted for 90% of Fluor’s $11 billion in annual sales but only 70% of its $268.1-million profit. Stein, who joined Fluor when it merged with Daniel International in 1977, was named president of the Fluor Daniel unit last month.

His downbeat message meshes with what stock analysts have been saying for more than a month as they bombard Orange County’s second-largest company with revised earnings estimates and downgraded stock recommendations that have put Fluor under more pressure from the investment community than it has seen in more than a decade.

Indeed, the company is being punished in the market despite a first quarter that many businesses would die for--an 8% increase in earnings on a 43% sales gain. But the stock price has fallen 27.5% in the nine weeks since Fluor announced the results, illustrating how demanding Wall Street can be. The price has dropped because the company fell short of its goals, not because it didn’t make more money.

On the defensive since shocking investors with its Feb. 18 quarterly report, Fluor has taken an abrupt U-turn from an expansion campaign that saw Fluor Daniel add scores of operating units and layers of management to run them.

This year, Stein told employees, Fluor will be closing and consolidating offices all over the world, laying off workers, thinning its management ranks and even abandoning the high-ceilinged, wood-paneled executive suites on the top four floors of its Irvine office tower as it moves to slash costs.

“We are going to be reallocating resources and focusing on areas with the highest growth and greatest amounts of bottom line,” he told employees. Several of the more than two dozen new businesses Fluor has gotten into the past three years “are really marginal in bringing a return,” Stein said.

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Fluor, which once concentrated on building oil refineries and power plants, has expanded into 30 operating units involved in everything from designing paper mills to cleaning up nuclear waste sites.

Each unit has its own management team and that mid-management has added to the costs and complexity of doing business, Fluor Chairman Leslie McCraw says. When Stein is done with his cost-cutting program, Fluor still will be building automobile factories and pharmaceutical plants, but there probably will be only a few operating units and fewer than a dozen unit managers reporting to Stein.

So far, Stein has announced plans to reduce the size of the company’s Vietnam and Thailand offices; close its 150-employee office in Dusseldorf, Germany, reassigning some workers and laying off others; eliminate the three-person Tokyo office that costs $500,000 a year to maintain because of Japan’s tremendous real estate prices; and downsize the company’s Chicago office and lay off 100 employees there.

The company also has said it will save $3 million over the next two years by abandoning its executive suites in Irvine and will save $10 million a year after it moves into new, smaller corporate headquarters in Aliso Viejo in 1999.

Stein says there will not be massive layoffs in a company that has grown from about 11,000 salaried employees to 27,500 since 1983. But some departments reportedly are tossing around layoff figures of up to 10%, employees say.

And managers are so concerned over contributing their share of the cost cutting that there reportedly are serious discussions going on over topics such as how many Christmas cards the company can afford to send out this year.

McCraw says he and his top executives will be taking details of the cost-cutting plan to investors and stock analysts around the country next week, along with this message: Despite the beating its stock has taken since its first-quarter earnings were released, Fluor is solid, under control and well on the way to securing its place among the top 25% of major U.S. corporations in 1998.

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The company’s future, though, has never been called into question. Most analysts say they realize that Fluor’s problems are temporary and believe the company can get back on track.

The question is how soon, says analyst Michael Dudas of UBS Securities in New York. “They need to give investors a detailed plan, a sense of where they are going.”

Until that happens--and Fluor says it will start thawing its freeze on information next week--the company remains under attack.

Its retrenchment is seen by some as a defeat for McCraw, the architect of Fluor’s recent expansion drive. Indeed, some industry analysts are suggesting that it is an admission that top management lost control for a while and that Fluor’s is a cautionary tale of the dangers of growth for growth’s sake.

“The company uses the analogy of the gardener who plants 100 flowers so that while some will die, others will bloom,” says John McGinty, who follows Fluor for the Credit Suisse First Boston brokerage. “But not enough of them bloomed. Clearly, they went too fast.”

Top Fluor executives bristle at the suggestion that they might have lost control of things, but what McCraw calls a bit of “fine tuning” clearly is an effort to tighten the reins.

“We had great success accomplishing our objectives” to increase the company’s size and scope, says James Rollans, Fluor’s chief administrative officer and a 15-year veteran of the company. “The rub is the cost associated with having a lot of things going on.”

The meetings with investors and analysts are part of a quarterly dance most large publicly traded companies stage just after releasing earnings. But Fluor wants to put the best spin on things before its scheduled May 21 release of second-quarter earnings, which are expected to be lower than previously estimated.

The company’s admission that it faces sizable losses on two power plant projects plagued by cost overruns also has rubbed a raw nerve with many investors.

Fluor has refused to provide specifics about the projects, saying it still is negotiating payment issues with the prime contractors and doesn’t want to jeopardize its bargaining position.

But company insiders have said that one problem project is in Louisiana and the other in Saudi Arabia, where Fluor faces more than $20 million in cost overruns on a power plant it helped design and is building.

Stein said in his talk to employees that top management did let the Saudi Arabian contract go through without sufficient review. Fluor has several such contracts, which bind it to complete a project at a fixed price, regardless of how or why extra costs develop.

The company, he said, will have to “get a better handle on assessing high-risk jobs” and will begin taking a harder look at all of its contracts as part of its cost-cutting drive.

Analysts take such talk to mean that Fluor did lose its grip, but Rollans says they are over-analyzing things.

“The issue isn’t that we don’t have controls or can’t manage large projects,” he said. “There are only two” that are in trouble out of some 2,000 projects Fluor is involved in. The issue is a growth pattern that pushed Fluor’s operating costs out of balance with its earnings.

Now, McCraw says, “we are looking at the implications of that growth and fine-tuning things.”

Analysts say the company’s stock is likely to remain depressed until Fluor demonstrates that it has tuned its way out of its hole.

Fluor’s stock price had jumped almost $8 a share in the three weeks before the earnings report was released, hitting a record $75 a share on Feb. 18.

The next day, with analysts raising questions about Fluor’s ongoing performance, the stock fell to $62.

Three weeks later, Fluor shot itself in the foot when the usually savvy company staged an investment meeting in Scottsdale, Ariz., and then refused to answer many key questions.

“A lot of [negative] reaction came from the Scottsdale meeting,” McCraw said, shaking his head. “We were unable to give some of those who were there as much detail as they would have liked.”

It was worse than that, according to some of the analysts who attended. One called the daylong session “a debacle.” Stein, whose appointment as Fluor Daniel president had been announced just two days earlier, was presented to a weary audience near the end of the day as the man tapped to fix the company. But he wasn’t allowed to answer many of the questions put to him.

“It was too early to talk about this in Scottsdale,” McCraw said in a recent interview.

The company’s stock price, which had staggered back up to $64.50 when the March 13 Scottsdale meeting was held, plunged to $57.75 the next day.

With Fluor under attack from analysts like Smith Barney’s Tobias Levkovich, who questioned whether Fluor’s management was operating as a cohesive unit, the stock continued to fall, dropping to $50 on April 11--a two-year low--before struggling back up to Wednesday’s closing price of $54.375, a $1 gain for the day.

Fluor has been golden in recent years, soaring on the strength of a booming international market for Fluor Daniel’s engineering and heavy construction services and its A.T. Massey Coal Co.’s low-sulfur coal.

But the fact that it now admits to having $100 million worth of fat it can cut from its budget is something that will plague it for months to come. “They’ve always said, ‘Trust us, we can handle it,’ and everyone did. But now they didn’t live up to that promise and it lowers their believability,” said UBS analyst Dudas.

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Stock Drop

Despite increased sales and earnings, Fluor Corp.’s stock, which reached a 1997 high of $75 on Feb. 18, has taken a beating since the company announced that its 8% fiscal first-quarter profit increase fell short of the 14% anticipated by analysts. Weekly closing stock prices; sales and earnings, in millions:

Tuesday’s close: $54.38

* Market closed on Friday, March 28, due to Good Friday

Net sales

1st qtr. 1997: $3,434.1

Earnings

1st qtr. 1997: 62.0

All Over the Map

Fluor’s engineering and construction empire spans the globe. Some current Fluor projects:

International

Indonesia

* Engineering, procurement and construction for Pertamina oil refinery renovation in Cilicap

* Expansion and renovation of copper/gold-mining facility in Irian Jaya, including addition of new copper concentrator, a 74-mile pipeline and expansion of port facilities

Poland

Project management for renovation of Rafineria Gdanska, on the Baltic Sea

Peru

Expansion of Cuajone copper mining operation

Domestic

Hanford Plutonium Production Facility

Environmental cleanup of former plutonium production facility in Hanford, Wash.

Florida Overland Express

Project management for high-speed rail system

Dept. of Energy

Environmental cleanup of former uranium production facility in Fernald, Ohio

Source: Bloomberg News, Fluor Corp.

Researched by JANICE L. JONES / Los Angeles Times