OREANDA-NEWS. July 27, 2015. Fitch Ratings has affirmed the Fluor Corporation's (FLR) Long and Short-term Issuer Default Ratings (IDRs) at 'A-'/'F2'. The Rating Outlook is Stable. The ratings cover approximately \\$1 billion of debt outstanding. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fluor's ratings incorporate the company's well-established position in global engineering and construction markets, consistently positive free cash flows, solid backlog, diverse project portfolio, and effective risk management. Fluor's liquidity and experience in its core engineering and construction markets mitigate the risk of large project losses. In addition, its global scale and flexible cost structure mitigate the impact of cyclicality.

Fitch views Fluor's leverage as somewhat weak for the rating but within the expected range. Adjusted debt to EBITDAR (excluding project-specific leases) was 1.35x as of March 31, 2015 and reflects the impact of \\$500 million of debt issued in the fourth quarter of 2014. The increase in debt contributed to higher FFO adjusted leverage of 2.01x as of March 31, 2015 compared to 2.42x as of Dec. 31, 2014 and 1.29x at the end of 2013. The measure at March 31, 2015 reflects the absence of distributions to non-controlling interest due to timing; Fitch estimates that on a pro forma basis (assuming a steady run-rate with respect to such distributions) FFO adjusted leverage was 2.32x on March 31, 2015. Fitch calculates FFO by including the effect of cash payments to non-controlling interests or JV partners that are consolidated on Fluor's balance sheet. In Fitch's view, the company has limited capacity to issue additional debt at the current rating level.

Rating concerns include potential significant declines in backlog and new awards, the risk of further debt-funded cash deployment towards shareholders and subsequent inability to maintain current credit metrics. Cost overruns, project disputes and litigation are a normal risk, but unusually large losses could potentially reduce Fluor's cash flow and liquidity.

Fluor has been able to maintain a healthy backlog despite significant demand pressures and cancellations in its Industrial & Infrastructure segment. In addition, the company has increased backlog in its Oil and Gas segment notwithstanding industry wide project delays and cancellations driven by low crude oil prices beginning in Q4 of 2014. Fluor's ability to continue to win new awards in an adverse market, its global footprint, adequate financial flexibility and effective risk management support Fitch's ratings and the Stable outlook.

Fitch estimates Fluor's revenues will improve by mid- to high- single digits in 2015 fuelled by a healthy current backlog mostly driven by its Oil and Gas segment. The company had a \\$41.2 billion project backlog as of March 31, 2015 which is comparable to the \\$40.2 billion backlog in the prior year. The increase in backlog over the past year was primarily due to new awards booked in the Oil & Gas and Government segments, partially offset by a decline in backlog in the mining and metals business line of the Industrials & Infrastructure segment. The project mix within the backlog continues to be favorable with only 18% comprised of lump-sum or fixed-price contracts. Fitch expects the company's backlog to decline over the medium term, driven by declining project demand from the energy and mining sectors.

Fluor has improved operating margins recently despite revenue pressures. Gross margins improved in 2014 to 7.4% over 5.7% in the previous year. In addition, EBITDA margins expanded from 5.2% in fiscal 2013 to 6.6% in 2014 driven by solid operating performance and a consistent ability to complete projects below projected cost. The improvements in margins were also affected by a sharp decline in low margin mining projects and shift to more profitable FEED and EPC projects in the Oil & Gas and Industrial Infrastructure segments. Fitch expects the company's margins will remain in the range of 5% to 6% over the next several years.

Fitch expects Fluor to generate in excess of \\$300 million of FCF annually over the next several years including in 2015. The company generated \\$54 million in FCF in 2014, down from approximately \\$297 million generated in 2013, mostly driven by the timing of working capital. Fluor generated \\$236 million of adjusted FCF in the first quarter of 2015 (after adjusting for a one-time \\$306 million legal settlement). It consistently generates positive annual FCF although it can be lumpy quarter to quarter.

Discretionary cash deployment continues to be directed toward share repurchases while acquisition activity has been limited. Large share repurchases contributed to Fluor's debt issuance in 2014, but concerns about Fluor's leverage are offset by its financial flexibility to use future FCF to reduce debt relatively quickly in the event of weaker than expected construction markets or operating performance that could weaken the company's credit metrics. Other cash deployment includes contributions to pension plans that Fluor estimates to be \\$100 million in 2015. U.S. pension plans were 92% funded as of Dec. 31, 2014. The company terminated its U.S. pension plan in late 2014.

RATING SENSITIVITIES

Negative: Future developments that may individually or collectively cause Fitch to consider a negative rating action include:

--Sustained Adjusted Debt/EBITDAR above 1.75x;
--Sustained FFO adjusted leverage above 2.25x;
--FCF margins consistently below 1.5%;
--Additional debt issuance to fund shareholder-friendly activity.

A positive rating action is unlikely in the near term given the company's cyclical cash flows and the risk of large contract losses associated with potential cost overruns, contract disputes and related litigation.

LIQUIDITY AND DEBT STRUCTURE

The company held approximately \\$2 billion in available cash and marketable short-term securities which included \\$586 million of customer advances at March 31, 2015. The company also had \\$255 million of marketable securities that mature in more than one year at Q1 2015. Fluor's strong liquidity and financial flexibility is aided by strong annual cash generation and a favorable debt maturity schedule with \\$1 billion of senior unsecured notes maturing in 2021 and 2024. Liquidity includes availability under two revolving credit facilities totalling \\$1.75 billion, before the impact of letter of credit usage. Both facilities mature in 2019. Fluor has also provided guarantees totalling \\$15.5 billion for the performance of its joint venture partners as of March 31, 2015. Fitch views these guarantees as normal within the course of business in Flour's industry and a credit neutral.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Fluor Corporation
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--Senior unsecured bank facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper programs at 'F2'.

The Rating Outlook is Stable.