Excuse Aliso Viejo-based Fluor Corp. if it has felt the Internet blues. The engineering and construction giant is Orange County’s third-largest company in terms of worldwide sales. But its market cap of $2.3 billion places it only ninth among OC companies, well behind several technology companies with a fraction of Fluor’s sales and earnings.
And while the stock market has risen in recent months on dot-com fever, Fluor has remained bogged down by the effects of Asian flu and other external challenges, as well as internal change. Since early ’98, the S & P; 500 has risen roughly 25%, while Fluor’s stock has dropped about a third.
But if you cannot beat hot Internet stocks, you might as well join them. Fluor Chairman and CEO Philip Carroll, into his second full year with the company, said the engineering and construction giant is studying joint ventures with Internet companies. These joint ventures could result in possible IPOs, or Fluor might spin off one of its own units, a la what Rockwell International did with Conexant Systems. In any case, the result, Carroll expects, would be enhanced value for Fluor shareholders.
“We’re in the process of looking extensively at the Internet,” he said. “We will be in more than one e-commerce company before very long.”
It’s hard to imagine that Fluor, best known for designing and building huge industrial projects, could spin off units that would capitalize on the Internet craze. After all, as its spokesman Keith Karpe said, “You cannot just break out your credit card on the Internet and order a power plant.”
But Fluor is looking at the Internet in two ways. One is to make its operations more efficient by sending products and information over the Internet. For example, TRS Staffing Solutions is implementing “a state-of the art Internet/e-commerce strategy to increase the speed and quality of its services and capitalize on the enhanced growth potential this new technology offers,” said Fluor’s annual report.
Or Fluor could create Internet units for certain specialties. Since Fluor buys a lot of products and often in mass quantities, it’s considering establishing a procurement subsidiary that would operate online as a purchaser not only for Fluor, but also for other firms. Another potential area for going online could involve equipment rental, since Fluor owns the American Equipment Co., which provides construction equipment on a global basis.
But Fluor’s most obvious potential spin-off would appear to be its telecommunications unit, which provides program management services for the global telecommunications market. Last year, it won $600 million in work, compared to an average of $150 million for the previous three years. Level 3 Communications selected this Fluor unit for a $320 million project to manage its Local Loop IP Network buildout of fiber-optic cable and point-of-presence units. It’s working with AT & T;’s Fixed Wireless Services and AT & T;’s Broadband and Internet Services. Fluor recently was named program manager of a $500 million project to provide a communications network for the London Underground subway system.
“This is a knowledge-based company,” Carroll said of Fluor. “It always has been. We will find ways to profitably exploit e-commerce and Internet technologies.”
Carroll made his comments about the Internet during his first in-depth interview since taking over the top job at Fluor 18 months ago. He moved here from Houston, where he had been president and CEO of Shell.
Carroll said he’s often traveling outside of Orange County, but has settled in. He has a home in the sumptuous Smithcliffs community of Laguna Beach, and his friends include neighbor and venture capitalist Chuck Martin and investor Peter Ueberroth. He has joined the board of the Performing Arts Center and is part of that organization’s big fundraising effort. He’s also a member of Big Canyon Country Club in Newport Beach, which he called “a wonderful course.”
Last year, Fluor moved from its striking but antiquated headquarters in Irvine to new and smaller facilities in Aliso Viejo. The Park Place facility, built in the 1970s when Fluor rode high on oil prices, was known for its luxurious executive suite. By contrast, Carroll’s new office is relatively modest and small.
Carroll, a tall and personable man with a twinge of a Texas accent, spoke frankly about the problems Fluor has endured and what it needs to do to move forward.
It wasn’t any easier this past week. Fluor announced that for the first quarter ending Jan. 31, revenue declined 11%, as expected. Earnings rose slightly, to $52.3 million, up from $51.1 million of a year ago. But Fluor also announced that revenue in its second quarter would be weaker than expected. Within a day of the announcement, Fluor’s stock fell nearly 20%. Fluor also announced the closure of a New Jersey office and elimination of 300 jobs.
Since early 1997, when Fluor’s stock peaked at 75, it has endured tough times. Previous chairman and CEO Les McCraw diversified the company and decentralized management, a move that fueled revenue growth but was widely seen as causing inadequate oversight and the building of fiefdoms.
By the time Carroll took over in mid-1998, the stock was down below 50. Carroll knew he had his work cut out for him. But the Asian collapse worsened, the decline of oil prices to historic lows in late 1998 severely affected Fluor’s best clients and the low prices for coal affected one of Fluor’s most profitable units, A.T. Massey Coal.
“All of those things came together to make the task more difficult. It was a hostile economic climate. The drop in earnings was more severe than I would have liked. But nobody ever said I got to pick whether it rains or there is sunshine. You do what you have to do.”
Last year, Carroll announced a restructuring plan that resulted in the layoffs of 5,000 employees and closure of 15 offices.
Carroll reorganized Fluor from two main subsidiaries, Fluor Daniel and A.T. Massey, into five main units:
n Fluor Daniel, the big construction and engineering company. It remains the biggest unit by far, with $8.4 billion in revenue in 1999. Carroll said it now has “a much cleaner focus.”
n Fluor Global Services, a $2.9 billion (1999 revenue) collection of potential spinoffs,the telecommunications, equipment and staffing units, plus a federal services unit, a consulting arm and an operations-and-maintenance business. The subsidiary “didn’t do as well as I expected,” said Carroll. He attributed it to problems with American Equipment Co., which faced an industry-wide consolidation, and TRS Staffing Solutions, which faced problems because of its efforts to aggressively expand globally.
n A.T. Massey, a coal mining company with $1.083 billion in revenue in 1999. It has long been a profit center, but low coal prices reduced its profitability slightly last year to $147 million.
n Fluor Signatures Services, which provides administrative services to other Fluor units. Its employees must bill their hours to the appropriate Fluor unit. If other Fluor units are not happy with the services they are receiving, they’ll be able to go outside Fluor. “It has produced enormous change both in the outlook and the way services are delivered,” said Carroll.
n Fluor Constructors International Inc., which provides union labor for Fluor’s projects.
Fluor is also beginning a sixth unit, Global Development, Sales and Marketing, which reports directly to Carroll.
“Sometimes, projects like pipelines need a driving force. Many of these megaprojects don’t have a single big investor entity behind them. Historically, we have waited for development to be done by somebody else and when they got ready to build something, everything was in place. We were happy to do the details and design. What we will do is try to be much more of a catalyst for a complex large project, because we are very knowledgeable about how to do that. The principal objective is to create engineering and construction work.”
New Model
Carroll is implementing a business model that was designed by Larry Selden, a Columbia University professor, whose research focuses on linking sales and marketing efforts to a corporation’s share price.
Carroll said he and Selden implemented a similar system while Carroll was president and CEO at Shell. Carroll said managers are now thinking through their strategies of how they can win against their competitors.
Carroll said the model is a “powerful methodology.”
“Everybody needs to understand what they do affects the bottom line. If you don’t know that, then you don’t know what you’re doing,” he said.
Fluor also is spending $250 million on a new accounting and resource management system that will help management get information more quickly.
“When you get financial information that is two or three months late, quite frankly you cannot run a business. Today, the speed is much more important,” he said.
Fluor is also implementing a “knowledge management system” so that its employees from all around the world can share best practices, customer information and technological know-how.
“The collective wisdom of 50,000 very intelligent people” is available, he said. “What we haven’t done a good job of is making that collective knowledge available to everybody, rather than having it locked up in the head of a particular person.”
Performance Assessment
He said the new systems give Fluor managers the ability to assess performance down to a very low level and discover problems that are occurring on a real-time basis. He expects the new systems to give Fluor a leg up on the Internet, not only in creating new businesses but also by delivering services to its clients.
Carroll said the restructuring is ongoing. Thus far, he said, he’s pleased with what he’s seen.
“What we tried in 1999 was to re-focus and restructure the company so there was a clear and well-defined division of responsibility and accountability. We moved away from an organization that was a matrix. It was an organization with problems of clear accountability, of who was making decisions. We went instead to an organization with clear lines of authority. Now I know the names and home telephone numbers of people I hold accountable for various segments of the company.”
During Carroll’s first full fiscal year on the job, for the period ended Oct. 31, total revenue decreased 8% to $12.42 billion while net income, hurt by a $117.2 million reorganization write-off, decreased 56% to $104.2 million.
Analysts remain less than bullish about Fluor. Out of eight analysts listed on First Call, only one calls it a strong buy, three say it is a moderate buy and four rate it a hold.
They like the job that Carroll has done in reducing debt and restructuring. An upturn in oil prices and a stronger Asia should also help.
But on the negative side, analysts are not entirely buying Carroll’s pitch that the decline in new orders simply reflects a focus on higher-margin projects. Fluor’s gross profit margin improved to 5.7% for fiscal 1999, up from 5.2% in 1998 and 3.7% in 1997, but still down from 5.8% reported in both 1996 and 1995.
The total new awards have fallen to $6.8 billion for fiscal 1999, compared to $12.5 billion in 1996. Perry H. Roth, a senior analyst for Value Line, wrote in a Jan. 14 report that “despite Asia’s gradual rebound, lucrative foreign E & C; projects remain elusive for the most part.”
Growth Expected
The Street is expecting annual earnings growth of 10% over the next five years. Carroll said he wants to exceed that figure and to boost the stock price in the process.
“Historically at Fluor, we haven’t done very well,” Carroll said. “We have operating returns on assets which are below our costs of capitalization, which means you’re destroying shareholder value. We have set off on a course to improve that, both by improving earnings and cleaning up the balance sheets by getting certain non-performing assets off the books. You cannot do this overnight. It is my intention that in the next three years, total return on assets will be well in advance of the costs of capital.”
Carroll wants to convince the Street that it’s not only dot-coms that have potential.
“The reason dot-coms are given, some would say, inflated share prices, is because the market perceives very powerful flows available to them and that’s what people will pay for,” he said. “We’ve got to find a way to make this company grow, and we will. If you have long-term consistent growth of 12% to 15% in earnings per share, the market will generally reward you.
“In order to do that, we’re going to have to devise new businesses, like e-commerce. We’re going to have to sell our talents to new and different clients. We’re not going to neglect or abandon our old clients, but we have to come up with new service offerings if we’re going to come up with the 12% to 15% growth per share, which is clearly my objective.” n
DOER’S PROFILE
PHILIP J. CARROLL JR.
Education: Bachelor’s degree in physics, Loyola University, New Orleans; master’s in physics, Tulane University
Career: Joined Shell Oil in 1961 as a petroleum engineer and worked in virtually every major division. In the early 1970s, he worked for the U.S. Department of Commerce as director of its Energy Conservation Division. Returned to Shell in 1974. Forced to retire at age 60 in 1998, joined Fluor. Also a director of Boise Cascade Corp. and Vulcan Materials Co.
Residence: Laguna Beach
Family: Wife, Charlene; three children and 3 grandchildren
Hobbies: Reading, art collecting and wine collecting.
