Fluor Corp (FLR) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Fluor Corporation's Fourth and Year End 2017 Conference Call. Today's call is being recorded. (Operator Instructions) A replay of today's conference will be available at approximately 8:30 p.m. Eastern Time today, accessible on Fluor's website. The web replay will be available for 30 days. A telephone replay will also be available through 7:30 p.m. Eastern Time on February 27 at the following telephone number, (888) 203-1112, and the passcode of 5038292 will be required.

At this time for opening remarks, I'd like to turn the call over to Geoff Telfer, Senior Vice President of Investor Relations. Please go ahead, Mr. Telfer.

Thank you, Justin, and welcome to Fluor's fourth quarter and year-end 2017 conference call. With us today are David Seaton, Fluor's Chairman and Chief Executive Officer; and Bruce Stanski, Fluor's Chief Financial Officer. Our earnings announcement was released this afternoon after market close, and we have posted a slide presentation on our website, which we will reference while making prepared remarks.

But before getting started, I'd like to refer you to our safe harbor note regarding forward-looking statements, which is summarized on Slide 2. During today's call and slide presentation, we'll be making forward-looking statements, which reflect our current analysis of existing trends and information. However, there is an inherent risk that actual results could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences, in the company's Form 10-K filed earlier today.

During today's call, we may also discuss certain non-GAAP financial measures. Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at investor.fluor.com.

Now let me turn the call over to David Seaton, Fluor Chairman and CEO. David?

Thanks, Geoff. Good afternoon, and thank you to everyone for joining us. I'd like to start off by discussing what we are seeing in the markets that we serve and what we expect to see in 2018. We expect the economic growth to improve in the U.S. and globally this year. And our U.S. clients are optimistic about the recently enacted tax reform. And our clients both domestically and internationally believe improved commodity prices should drive an improvement in capital spending. All signs indicate that we are on the front end of a multi-industry upturn. We're closely tracking and well positioned for many major programs and we expect to get a final investment decision in the next 12 months, particularly in Energy, Chemicals, Mining & Metals and infrastructure.

In Energy and Chemicals, we're pursuing several gas monetization projects including ethylene, derivative facilities and LNG. This includes the LNG Canada project for Shell which we were recently shortlisted. We also see upstream projects moving forward, including pipelines.

We expect to build off of last year's success in Mining & Metals, and we continue to track a number of projects slated for FID in 2018 including copper, gold and iron ore replacement projects. While we don't expect to see the super cycle we saw earlier this decade, we do see a path to doubling our mining backlog from its current levels.

In infrastructure, we're able to start to move forward on the previously awarded Purple Line in Maryland and won the Greenline project in Boston in the fourth quarter. Our success continued in 2018 as we were selected for the LAX automated People Mover project, which we expect to close next quarter. We continue to see transportation programs advance globally and are looking forward to hearing details on the recently announced federal infrastructure funding plan. The plan appears to encourage private investment, which I think, plays well into our strong track record in developing public/private partnerships.

It's been a busy year in our Government group as they helped the hurricane restoration efforts in parts of the United States and Puerto Rico. In 2018, we will compete for the LOGCAP V contract and are looking at the Hanford liquid waste project, which is coming up for rebid this year.

We also expect diversified services to improve as clients begin to increase their maintenance spend. We believe 2018 marks the start of the upturn we've been waiting for so long. And I can tell you that Fluor is ready.

We've grown our maintenance, fabrication and construction capabilities. We made improvements to our systems and processes to improve project delivery and have invested in new data-centric execution platform that will use historical, standardized data to more accurately analyze and predict project outcomes. And finally, we're increasing our investment in our people through development programs.

Now let's look at our 2017 full year results beginning with Slide 3. 2017 net earnings attributable to Fluor were $191 million or $1.36 per diluted share. Excluding the onetime impact of the recent tax reform legislation of $37 million or $0.27 per diluted share, the company reported a net profit of $228 million or $1.63 per diluted share. Consolidated segment profit for the year was $545 million. Revenue for the year was $19.5 billion compared to $19 billion a year ago. New awards for the year were $12.6 billion, and ending backlog stood at $31 billion.

Now if you turn to Slide 4, the Energy, Chemicals & Mining segment booked $1.1 billion in new awards for the quarter, including an offshore project in the North sea. The ending backlog for Energy, Chemicals & Mining segment was $17 billion. Results for the year reflect a $44 million forecast adjustment related to estimated cost increases on a downstream project. This project is currently over 90% complete on construction, and we expect to achieve mechanical completion in the second quarter.

Fourth quarter new awards in Industrial, Infrastructure & Power were $483 million, including the Greenline light rail extension project in Massachusetts. Ending backlog was $7.7 billion compared to $15.1 billion a year ago. This decline reflects the removal of the 2 nuclear projects.

Regarding the remaining 3 gas-fired power plants we are currently executing, one project is substantially complete and in commissioning and start-up activity phases. The remaining 2 projects were approximately 75% complete and will be completed by year-end. One of these projects incurred an additional charge of $41 million in the quarter.

Turning to Slide 5, the Government group posted fourth quarter new awards of $1.1 billion and an ending backlog of $3.8 billion compared to $5.2 billion a year ago. New awards for the quarter were driven by task order awards from the U.S. Army Corps of Engineers to restore the power in Puerto Rico.

I had a chance to visit our people in Puerto Rico a couple of weeks ago, saw firsthand how we're helping to restore power in the island. We understand how difficult the last few months have been for so many families and are humbled by the outpouring of support from the communities in which we work. Since our arrival in October, we've restored power to nearly a quarter of a million customers. And we, as a side note, we've been active in Puerto Rico since the 1950s. And long-term Fluor employees there are some of those that have suffered from this devastating storm.

The Diversified Services segment posted fourth quarter new awards of $568 million, including projects to support clients and consumer products, power and energy industries. Ending backlog was $2.5 billion compared with $2.9 billion a year ago.

So now let me turn it over to Bruce. Bruce?

Thanks, David, and good afternoon, everyone. We have a lot to review today, so let's get started with our quarterly results.

Please turn to Slide 6 of your presentation. Let me begin by highlighting some income statement items and then move to the balance sheet. Revenue for the quarter was $5 billion, up slightly from $4.9 billion last quarter. Revenue improved in the Government and Diversified Services segment to offset the declines in Energy and Chemicals. Corporate G&A expense for the fourth quarter was $54 million compared to $56 million last year.

Earnings for the fourth quarter were $60 million or $0.43 per diluted share. This does, however, include $37 million or $0.27 per diluted share related to a onetime charge arising from the enactment of the Tax Cuts and Jobs Act in December. The principal amount of this charge was related to Fluor revaluating its deferred tax assets on the balance sheet from the previous federal statutory rate of 35% to the new rate of 21%. Excluding these tax effects, earnings would have been $97 million for the quarter or $0.70 per diluted share.

In addition, to help frame the quarter a bit, it's important to point out that our results include a benefit of other international tax items unrelated to U.S. tax reform, which contributed approximately $0.16; the nonrecurring hurricane work in the United States and Puerto Rico, which produced $0.09; and a $0.32 charge related to both a gas-fired project and a downstream project. The paint is still very much drying on tax reform, and we caution that our tax rate may vary by period as we receive additional clarification. I'll talk more about outlook for tax on Slide 10.

But shifting to the balance sheet on Slide 7, Fluor's cash plus current and noncurrent marketable securities for the quarter was $2.1 billion. This is unchanged from last quarter and from a year ago. Cash provided by operating activities was $602 million for the year. Also for the full year, we paid $118 million in dividends.

Moving to Slide 8, Fluor's consolidated backlog at quarter-end was just under $31 billion. The percentage of fixed-price contracts in our overall backlog was 37% compared to 25% a year ago when we did have 2 large reimbursable nuclear projects in our backlog. At quarter-end, the mix by geography was 42% U.S. and 58% non-U. S.

Turning to Slide 9, I want to cover the new revenue recognition standard that went into effect on January 1. Prior to the adoption of this new standard, the company segmented revenue and margin recognition between the engineering and construction phases of its contracts. Now we will recognize the entire engineering construction contract as a single performance obligation.

As you can see on this graph, which is for illustration purposes only, what that does is reduce the segment profit variability. Instead of recognizing higher-margin engineering first and transitioning to lower construction margin as we move into the field, now we'll recognize a consistent margin throughout the duration of the project.

You'll mainly see the effect of this new revenue recognition standard in our ECM and IIP segments and only on those contracts where engineering is part of the total performance obligation. This in no way impacts engineering-only contracts. You'll see our results reported under this new standard starting in Q1 of 2018. To help our shareholders translate from the old recognition system, we will be providing a reconciliation in each quarter of 2018 showing earnings per diluted share using the new standard compared to EPS under the old standard.

This is an incremental positive for earnings in 2018 as some engineering work performed in prior periods will be re-recognized using the modified retrospective method. This method does not change prior periods but simply adjusts opening balances. Over time, the new standard should result in less variability in our recognition of revenue and margin over the term of the contract.

Lastly, I want to point out that starting in Q1 of 2018, we've moved our mining business into our Industrial, Infrastructure & Power segment to better align our external reporting with how these business segments will be managed.

I'll conclude my remarks today by commenting on our new guidance for 2018, which is on Slide 10. We're establishing a 2018 earnings guidance range of $3.10 to $3.50 per diluted share. The EPS range is inclusive of the new revenue recognition standard and also assumes G&A expenses of approximately $210 million to $220 million, excluding any impact of foreign exchange gains or losses.

We're also assuming a yearly tax rate of 25% to 30%.

NuScale expenses are to be approximately $75 million in 2018.

Based on our current interpretation and analysis, the benefit of the new revenue recognition standard and tax reform in the U.S. will be approximately $0.75 to $0.95 per diluted share, and approximately 2/3 is related to new revenue recognition standard and 1/3 related to U.S. tax reform. Our guidance reflects an expectation of gradually quarterly improvement in 2018.

We do anticipate average full year margins in energies and chemicals groups to be in the 6% to 7% range; Industrial, Infrastructure & Power, including mining but excluding NuScale, to be in the 3.5% to 4.5% range; Diversified Services to be around 4.5% to 5.5%; and Government to be approximately 3% to 4%.

So with that, operator, we're ready to take questions.

(Operator Instructions) Our first question today will come from Steven Fisher with UBS.

I just wanted to ask about guidance. The release says that the guidance assumes an increase in oil and gas and mining and infrastructure opportunities. Can you just give us a little more clarification on what you assume has to happen from here and when it will happen to hit that guidance?

Well, we're not going to talk specifically about each project. But as we said in the past, we do believe the new awards are back-end loaded for the year. So we think that new awards will build as we go through the year, as will our earnings.

Okay. But I mean if the new awards are back-end loaded, I mean, how much of an impact do you assume that's going to be for 2018 versus 2019? I mean I guess what I'm getting at, are some of these big things that you're anticipating, is that embedded in what still has to happen in 2018 or is that more forward-looking?

Well, I think it's a little bit of both, Steven. I mean, obviously, the things that are in front of us to book are very large projects that are multiyear in terms of their burn. Most of these projects are at least 2 years in duration, if not 3, and multibillion dollar kinds of projects. So the guidance certainly bakes in what we think that win -- the win quarter would be and what that burn would end up being. So I know I'm not answering this specifically, but I'm not going to give you all the details on which projects.

Okay, that's fine, I can follow up. The margin target is certainly helpful. The 6% to 7% for E&C stands out as a little higher than expected. Just wondering how much of that is some of the re-recognition, Bruce, that you talked about versus any kind of mix changes versus kind of fixed price? And is that 6% to 7% -- would that be considered more normalized? Or again, is that sort of a onetime step-up because of some of the re-recognition?

Well, before Bruce answers that, I want to put a point on that. As we focused on integrated solutions throughout the last 2 years and perfected some of those things, we believe that the margin in backlog today and what it will be going forward will be better than it's been in previous cycles. So a fair amount of that is just an improved execution base and the margin associated with that. So Bruce, you can follow up.

Okay. So Steven, thanks. And certainly the margins that we're talking about are the margins we're having on our range of earnings guidance. So that's total for the year, all in, as we look at quarter on quarter what we're making as margins in each of the segments. But maybe I'll take a minute here and get in front of maybe you and others' questions about this whole revenue recognition adjustment. And we did provide the range of $0.75 to $0.95, and we broke it down how much we believe is rev rec versus the tax reform. But just to put this in context, revenue recognition change for us impacts about 125 active projects, whose quarterly results will vary depending on how the work progresses through each of those projects and the mix of those projects in the quarter. And tax reform has similar challenges, as we have to recognize tax from the territorial source of the work, including new work and existing work. And also, and this is where the 2 are interrelated, and that's kind of why we're giving a single range is the revenue recognition provides new tax rates that we have to apply to re-recognize revenue on these 125 different projects. So I guess what I'm saying is they're very interrelated, and we won't know the exact impact of rev rec and tax reform until we close each quarter of the year. That's why we're giving ranges and estimates that we think are most accurate today. Does that help, Steven?

Yes. I guess maybe one follow-up, is it fair to ask then, if we think about beyond 2018, if you have the same mix of what you have in 2018, would you still come up with a 6% to 7%?

Yes, we would. I mean yes.

Our next question will come from Jamie Cook with Crédit Suisse.

David, first question, not that I'm going to allow you to back out the charge in E&C in the quarter. But if you do back that out, your implied margins in that segment were about 7%, which is higher than I would have thought. So can you talk to whether any onetime gains or mix or anything driving that margin, if we back out the $29 million on the petrochemical charge -- project? And then understanding you don't want to give guidance within guidance, can you talk about -- you seem much more constructive this quarter relative to the past 2 quarters and even last quarter on the opportunities on the E&C business. So can you rank order in terms of award opportunities as we're sitting here 12 months out? Is it bigger in E&C? Or is it bigger in mining in terms of the potential award trajectory?

What was the first question?

The first question was why were your margins good in E&C ex the charge, ex the $29 million that was...

I'm kidding you, Jamie. I'm kidding you. It's the answer I gave Steven. We -- I think the approaches that we're using on those projects that we've been able to fully implement, the new strategy, the integrated solution are providing us with better returns than we've had in previous cycles. And I believe that, that will continue. So I think part of the question was anything special in there that led that to be that number. The answer is no. So I think that, going forward, we're doing a much better job of that. Now on the new awards, and I think I said in the prepared remarks, the really sizable projects that are in front of us right now are primarily in oil and gas, with mining second. And then I would say infrastructure is following behind that. But as we've talked in the past, there's such huge pent-up demand. I was in the Middle East last week over the weekend and just kind of looking through the Gulf. Stated spend over the next 5 or 6 years is $500 billion, just in the Gulf in the oil and gas sector. I think that's a -- you add to that the other industries out there, but then you multiply that by the number of regions in the world, you can see that the opportunity slate has grown dramatically over the last 2 years. Now we still got to get these customers to get -- pull the trigger on some of the spending. And we're very well positioned for our fair share which, as you know, I like a bigger fair share to be a fair share. There's a lot of opportunity globally. And I really think -- my concern right now is if all this stuff happens at the same time, we can end up with another super cycle in oil and gas that we saw in the first part of the 2000s and the issues that go with that. But I feel good about the opportunities in front of us. I feel really good about the positioning that our people have put us into in terms of those projects. And I'm even more optimistic, given the success of some of the projects that were bid and are operating under that integrated solution. As I said I was in the Middle East, I was in Kuwait and went to both the clean fuels project as well as the new refinery project. And I'm quite happy with what I saw in terms of execution and in terms of our financial position on those projects. So we got to get some spending going. We got to get some customers to actually sign on the dotted line in terms of that FID. But I'm pretty optimistic about oil and gas. And then on mining, there's some very large projects. I mean, I don't think it will be what it was in the last cycle, because most of it's replacement capacity as opposed to new capacity. They're not really relying on a growing China anymore. They're looking at how they maintain market share, and that's what's driving those things. And I think there's very few companies in that particular segment that can do these big projects. So we feel pretty good about our positioning on those that we're pursuing. And in both cases, it's all over the globe. There's no one place, geography-wise, that stands out over another.

And our next question comes from Jerry Revich with Goldman Sachs.

David, can you talk about your expectations of the margin profile over the next set of projects? The whole industry struggled a bit on the last set of major awards a couple of years ago in terms of executing to those projects. And I'm wondering if you could talk about the competitive landscape as you see it now, and what changes should we be looking for in the bid process for, hopefully, better outcomes?

Well, I think -- I've always said that it's a dogfight every day, and I still believe that. There is no such thing as a good day with competition. I think that in the last cycle, you saw some people take some pretty predatory pricing approaches, and they're suffering from that. We try to kind of select the projects we felt more comfortable with and the customers we felt more comfortable in working with. And even saying that, we had our own challenges, and we've dealt with those and we've learned from those. But we've talked about the margin profile going forward in terms of all the industries, as Bruce indicated. But I would say, we kind of tried to stick to our knitting in those projects that make the most sense for us where we have a competitive advantage as well as a technical edge. So as I said, I feel like we're positioned very well on a lot of these projects that are in front of us from methanol projects to LNG projects to refinery projects and petrochemicals. So I feel really good about the team there and what they've been able to do in what was -- what's been probably the worst capital approval process I've seen in my career. If you really think about it, there's been close to no spending. And obviously, there's been spending, but none of any consequence in half a decade. And because of that, you got -- you had our competitors being predatory because we enjoy that diversity, and we don't have to take some of those projects where many of our competitors are in one industry, as an example. So the diversity plays well for us and allows us to maybe take a little bit different tack. But as I've said in my answer to Jamie, I think there's a herd mentality in the industry. And when spending starts, I feel like they got to make sure they're in the head of the queue for everything from pipes and motors and pumps and the like, as opposed to those that are going to be later in the cycle. So I think discipline is something that we're going to continue to play. I think discipline, in terms of what -- the elements of the integrated solution that we've invested in, the tools and systems we've invested in in this downturn as well as the investment in the people we made, I think we're in a really good position. But again, staying true to that discipline and the projects that really fit our needs is going to be things that we're going to focus on.

Maybe just a question for Bruce. There was a $300 million to $350 million adjustment to retained earnings, Bruce. Can you talk about was that all related to revenue recognition?? And can you just give us a rough sense as we think about pro forma margin profile for Fluor over the past couple of years? If we were to apply the lens of the new accounting standards, what sort of adjustment should we be making to the margin structure versus reported on '16 and '17, just so we can gauge cycle-over-cycle performance with the new accounting going forward?

So Jerry, I think you might be referring to the $300 to $350 range in our K that we put out, the impact of revenue recognition. So let me -- that range is over a 3-plus-year period, so that kind of gives you an idea of how it plays out over the time period. As far as very much like what I said in my prepared remarks was this takes out the variability of our revenue and earnings recognition. So the margins that we're quoting on a go-forward basis will be more consistently achieved, because we won't have the high margins on the engineering work and then the lower on construction and you and us having to model all that out. So I don't know if that helps you talk about cycle over cycle, that's kind of my answer.

Okay, and that's helpful, Bruce. So just to clarify the fact that we're making a negative adjustment to retained earnings means margins would be negatively adjusted in prior years if we were to apply the current accounting standards, correct?

Well, certainly for the next period that we talked about, it's accretive to earnings, the revenue recognition standard, and it goes beyond this next period. Again, how it falls out, the time period and the framing of it, we will know as we close each and every quarter. One of the things from the tax perspective, as I said they're interrelated, is unlike a lot of companies that do an estimate of taxes at the beginning of the year and then true up at the end of the year, we actually do a hard close on our taxes every quarter. Makes it a little more difficult to model, but we think it's a more prudent way to get our tax rate right every quarter. So we're going to be seeing as we close these quarterly books exactly where we land on rev rec and tax, and so will you when we close the quarter.

Next will be Tahira Afzal with KeyBanc Capital Markets.

So David, you talked about a lot of your sectors. You didn't talk that much about power. Any thoughts in terms of outlook over there? And then on the LNG side, you mentioned some in Canada, but would love to get some color on what you're seeing in the U.S. as well.

On the LNG, I mean obviously there's one we're pursuing in the Gulf Coast. As I've said in previous, I think we're going to see onesies and twosies over the next couple of years as some of these other ones come online that are nearing completion and the market absorbs that LNG product. But those, the one in the Gulf Coast and the one in Canada, I think we're very well positioned for. If -- when you think about power in general, we're continuing to pursue projects, gas-fired projects and other renewables. We're looking at pursuing nuclear in Saudi Arabia and some other places. So I mean it's one of these things where I go back to my comment just a minute ago about discipline and adhering to that integrated solutions approach. So I think that there's some opportunities out there that are on the gas side kind of near term, say this year. And I think the other stuff is in the out years. But we're going to continue to pursue the things that makes sense in the power sector. We do have some good projects in that market as opposed to the 4 that we dealt with over the last 2 years. And we'll continue to push that market as well.

Got it. And just as a follow-up, you touched on nuclear with some pretty big milestones for NuScale fairly recently. Any thoughts in terms of update over there, David?

That's a great question. We've had some really good news in terms of the technical review. And I believe the NRC is on target to complete that piece of the review early, which just gives us confidence that we're going to finish the whole process I think at record speed. And once we've got that good housekeeping seal of approval, our focus right now and after that is obviously to bring in new investors and to continue to find other customers. We're looking to the DOE. And I actually met with some Government officials in the U.K. yesterday, and there's great interest in the SMR technology there. So I think that steady as she goes, but I think the fact that the NRC is progressing the way it's progressing shows that NuScale really had its act together in terms of where the technology was, what the key issues were going to be. And we're very prepared to field those questions and provide the answers to satisfy the NRC. So all in all, I feel pretty positive about that schedule. And with that schedule, I feel better about bringing in additional investors.

And our next question will come from Andy Kaplowitz with Citi.

David, so customers obviously have been talking more about CapEx, part of it because of tax reform, part of it because of higher commodity prices. Have you seen engineering sequence yet? Have you seen the precursors of these projects yet? Was the higher margin in EC&M [add along] in the quarter because engineering utilization is up?

No, no, no. I think -- I wouldn't say that it's up this quarter necessarily. We've got a lot of FEED work going on in the early stages of projects. But no, I wouldn't say that's impacting the margin per se. But when you look at the some of the decisions that are being taken, it's in line with what our expectations are going to be.

Okay. And David, you've obviously seen several cycles now, and you kind of alluded to that. How would you compare today's funnel when you add up call it your high probability energy and mining projects versus the cracker cycle a few years ago and versus the refining cycle in the mid-2000s? Is it bigger when you add it all together than those cycles, the same or maybe smaller?

Well, I think it's bigger. I think it's bigger. The projects are bigger, there's more of them because of the delay. I'm pretty bullish on what that future looks like. And there's some really good projects in the funnel right now, to use your term. I would say it's bigger than the '05, '06 time frame.

That'd be pretty good if it develops like that. Just one more follow-up if I could.

We've been waiting a long time. I'd tell you, you kind of hinted on tax, I'll address that. I would argue that on the oil and gas guys, tax reform is good, but it's not going to drive their decision-making. Most of their projects are global in nature. And yes, it's a good deal for earnings, but I think the lion's share of the decisions won't be driven by that. Where I think it's going to really have a benefit is in advanced manufacturing, pharmaceuticals, some of the fine chemical work that we do. Because it helps those companies become very competitive, particularly with the U.S. manufacturing base, much more competitive on a global scale and much more comfortable to invest in that upgrading or to increased capacity or even a new facility. And we're tracking a lot of those projects in the manufacturing sector. Now they're not the multibillion-dollar projects, but they're really good projects that are $200 million to $300 million, and there's a lot of them. So again, I go back to the comment about diversity. We're going to have the big stuff that you guys like to see, and it does drive our business. Well, I think the baseload of those small to medium-sized projects is growing much more than I anticipated, and I think it's going to bode well for all of our sectors. I think the other piece, in my prepared remarks, when you think about Stork and that whole maintenance piece of our business, people stopped spending. Well, and when they stop spending on certain things like that, they start to have failures, and the shutdowns get longer with more work, and the frequency of those issues pick up. So I think it bodes well for Stork and the rest of that Diversified Services business to again be part of that diversity that raises the water level for the ship here. So I'm pretty bullish, I think, on the future. The question's going to be is when. Now all indications are, and I'll give you an example, I was worried about kind of the way the year ended with new awards. It was a low for over many years. We had 2 big projects that were -- the client said we're going to sanction. We already have the projects we're going to sanction in the fourth quarter. And in fact, both of them moved to the second quarter for -- one in the second quarter, one in the third quarter of '18. So again, project makes sense, business model works, we're ready to go. Well, let's wait one more quarter and see what else we can do. So again, the frustration here is at what point do we get to start on these projects. And there are projects, we haven't lost anything that we've really pursued in terms of those big projects. So I think we're kind of in an interesting place, and I think we're well positioned, as I've said. But timing's going to be -- is going to be the volatility this time as opposed to how we segment our business.

And next will be Michael Dudas with Vertical Research.

David, when you look at today's year-end backlog, how much would you peg as backlog that was bid or secured prior to your integrated solutions, improved tools and solutions methods and -- relative to what's in there today using those? And will those types of opportunities allow the continued improvement in the sold margin and backlog and the execution to drive improved margin performance over this upcoming cycle, if we're -- a relatively meaningful basis if the cycle turns out the way we all hope it will.

It's a hard question to answer, Michael. And the reason is that most of the projects that are in that reimbursable bucket, we care that our customers are embracing the integrated solutions approach. But as we've talked about, some of them aren't. So you've got a sizable amount of our backlog that it doesn't matter, right? We're going to do what they ask us to do, and we're going to make money on it. Of the fixed priced component, clearly, the 4 prior projects weren't, but we're almost done with those. And the project in the oil and gas sector was also bid prior to that. So I would say it's a pretty small percentage of the fixed price portion that we're still working off of.

And as the cycle emerges to the business that the traditional customers are just going to hire you and pay for, when do you think they'll start to see that there might be tightening in labor, engineering talent, fabrication yard facility? And in this cycle, will a company like Fluor be able to extract more value from that in 2019, 2021?

I think absolutely. That's why we put together that whole process and we invested in our tools and systems. We invested in our supply chain, fabrication, the construction capability of the company. So we've got that one-stop shopping approach that our customers are looking for, and in the same vein, be able to kind of protect our way of executing earning on those projects. So I think we're going to start to see -- break it down a little bit here. I think we already have pinch points in construction. We've seen, in some of these projects that the industry, not just Fluor, but the industry's had issues with, it's almost exclusively because of either lack of talent or lack of people in that construction rank. What we've done globally is try -- is look at training and make sure that when those people aren't available to us in a location, we're setting up training programs to make sure we got the welders and the pipe fitters and the electricians and the like. So I think we're a little bit ahead of the game on that. I know I'm marching backwards, but I think construction's going to be the first place we see a pinch point because we've already seen it in the last -- a couple of years ago, what we thought we were going to see before oil prices drop. I was really worried because we had to go to somewhere around 50,000 craft labor in the U.S. with the work we had. But the projection said we needed to double that. Well, that, I think that would have been an impossible undertaking, given the situation at the time. Now again, since then, we spent a lot of time and effort on training people. So I think we feel good about being able to get those folks. On procurement, I think you'll start to see the pinch point in several ways, but it's probably not until we get into late '18, early '19. And you're going to see it in 2 ways: One is there's going to be a saturation point, given the capacities that are out there, and that's the first thing we'll see. It's going to be not how much does it cost, but when can I get it, which we've seen in the last cycles. Second piece is when they become stretched, quality is challenged. So we're going to have to make sure that we're in those shops managing that work. And some cases in this current cycle right now, we've got fabrication yards that are providing for us, not for ones we own, but we've actually had to go in and take over the management of those yards to make sure we can get the deliveries that we have to have. So quality is going to be the second thing that I think wanes, but we won't see that until late '19. If things -- again I go back to what I've said, if FIDs and pulling the trigger happens in the first quarter, that would be the time frame that we would see. On engineering for us, I don't see that as a big challenge, and that's for 2 reasons. I still think that we're an employer of choice. And the folks that have the big projects, that's where those people want to come work. And we've proven time and again that drawing those folks to our locations from an engineering and project management perspective have not been a challenge. Second piece of that is in that integrated solutions model is the investment tools and systems that we made and a dispersed execution, so that we don't have to take Houston over 4,000 people again. We could leave it around 2,800 and the other offices where they are and moderately increase each of them, as opposed to having those boom and bust that this industry has typically had in those engineering offices. So I -- again, we hadn't proved it. The projects in Kuwait, I can tell you, are proving the process. But until we get these awards going, we're not going to know whether any of those predictions on engineering, procurement and construction come true.

And our next question will come from Andy Wittmann with Baird

Maybe for Bruce, I guess I wanted to ask a little bit about book and burn type business. What's a good number? Or maybe historically, how much revenue have you seen from book and burn type business? And how does that compare to your expectations for 2018 for that type of business?

Well, Andy, you know we don't provide revenue guidance here. And I guess our book and burn, it certainly was a bit light in the quarter, about a 0.66. Certainly, we expect that book and burn ratio to pick up as we book larger projects that David just talked about into our portfolio going forward and a higher burn rate as they move through their life cycles. But certainly, this was a low quarter for book and bill and book and burn, as you call it, and we expect it to increase.

I guess I'm specifically asking about the types of smaller projects that don't actually hit backlog that contribute to revenue. Is that material? Is there any changes that's happening to the historical rates of that type of work?

Yes. Well certainly, in our O&M businesses and the big star here in the quarter has been Puerto Rico. We brought that out a couple of times. We get -- we do quick burns on revenue as it comes in. And that certainly -- that does impact our book-to-burn ratio in a positive way but not in a sustaining way. And it comes and goes as the need arises and the urgency increases for that contingency work that we do. And that also extends into what we do for the Army and contingency operations. But Stork is another example of that where they take on a lot of work quickly, certainly the end of a period or, as David said, as assets get distressed. And they are forced -- our customers are forced to move out quickly and engage Stork and push a lot of money to get their assets back operational. So yes, positive impact but not sustainable, Andy.

All right. Let's go maybe a little bit different direction here. I was just looking at your K, and you still do have some decent operating losses that potentially could shelter your cash taxes this year. How do you expect your cash taxes to compare to your GAAP reported taxes? Are you going to realize some of the benefits this year? Do you expect to? And how much?

Well, certainly, we're sorting through the whole tax profile now, and the new tax reform act does a lot of good things. You see the onetime charge we took in the fourth quarter to -- for our deferred tax assets, where a good thing of lowering the U.S. tax rate to 21% equals a charge in the fourth quarter because we had put those assets -- those deferred tax assets on our balance sheet at 35% tax rate, had to write it down to 21%. So there are a lot of moving parts like that relative to our tax portfolio and profile that we, again I keep repeating myself, will be understanding better and better as we close each quarter through 2018.

And our next question will come from Chad Dillard with Deutsche Bank

So just a question for you on Puerto Rico. How far along are you in executing those projects? And by my numbers, I think you're around 25% of the way done. Just trying to think through just how the earnings contribution cadence ramps from [9th] since this past quarter and into the beginning of the year, sets the stage for first half, second half.

We're about 80% done, not 25% done. We've got about another month to go with the task order that we were given. We -- I think we're 82% or 83% complete as of the end of January. So again, as Bruce said, that was -- that's quick book to burn because it burned from October to -- through the end of March.

And the task orders we had on that, approximately $1 billion, to give you a (inaudible) for Puerto Rico.

Okay, that's helpful. And then could you spend some time talking about your government project pipeline and, more particularly, LOGCAP V, and how this opportunity could differ in terms of revenue contribution size versus LOGCAP IV?

Well, the way they're bidding it, obviously you're bidding multiple areas for task order 5. So that includes obviously the Afghanistan command, the African command and the like, and we're active in all of those. I think the profile that you see the U.S. Military follow is probably going to be pretty consistent. So I think that that'll continue to be a big part of our earnings stream over the longer term. There's several things in the DOE that we're pursuing. There's some rebids that are going on as well as some of the base operation contracts that are coming up. So it's a pretty robust slate of projects. But clearly, LOGCAP is the big dog on that block.

And that does conclude the question-and-answer session. I'll now turn the conference back over to the presenters.

Thank you, operator, and thank you to all the participants on the call today. As I mentioned earlier and throughout the questions, I'm encouraged by the commentary from our clients regarding their capital spending plans and the overall economic outlook. But again, I caution the timing of which, just because of those decisions. We have prepared for this turnaround in investment. And I think our integrated solutions approach, our people and our redoubling our commitment to safety is -- puts Fluor in a unique position. I greatly appreciate your support of Fluor, and I wish you a good day.

Well, thank you. And that concludes today's conference call. We do thank you for your participation today.