Earnings Call Transcript - FLR Q2 2021

Operator, Operator

Good morning, and welcome to Fluor's Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's presentation. A replay of today's conference call will be available at approximately 10:30 AM Eastern Time today, accessible on Fluor's website at investor.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available for seven days through a registration link, also accessible on Fluor's website at investor.fluor.com. At this time, for opening remarks, I would like to turn the call over to Jason Landkamer, Head of Investor Relations. Please go ahead, Mr. Landkamer.

Jason Landkamer, Head of Investor Relations

Thank you, Hannah. Good morning. Welcome to Fluor's 2021 second quarter conference call. With us today are David Constable, Fluor's Chief Executive Officer; and Joe Brennan, Fluor's Chief Financial Officer. We released our earnings statement earlier this morning and we have posted a slide presentation on our website, which we will reference while making prepared remarks. 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 presentation, we'll be making forward-looking statements, which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences, in our 2020 10-K and in our Form 10-Q which was filed earlier today. During this call, we may discuss certain non-GAAP financial measures. Reconciliations of these amounts to the comparable GAAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at investor.fluor.com. I'll now turn the call over to David Constable, Fluor's Chief Executive Officer. David?

David Constable, CEO

Thank you, Jason. Good morning, everyone. Thank you for joining us today. Before we move into operational results, I want to acknowledge the passing of J. Robert Fluor, II. Bob was the great grandfather, founder and worked at Fluor for 42 years before retiring in 2009. For 27 years, he led the Fluor foundation, our charitable and community involvement organization that was established by his father and his uncle Si Fluor in 1952. Throughout his career, Bob brought meaning and value to the act of giving back, inspiring thousands of employees across the company and across the globe to commit time and resources to bettering their communities. The company will continue to build on Bob's legacy of supporting stronger, more sustainable communities around the world. In a few minutes, Joe will walk through the financials of our business and each of our segments. Let me first provide a high-level overview of what we are seeing in each of our major end markets, starting with Urban Solutions. Please turn to Slide 3. In mining, work is tracking broadly to our expectations for the next 18 months. We have seen a few large projects shift to the right, as detailed estimate reviews and scrutiny of projects by our clients prior to an investment decision being taken is higher than we have seen in quite some time. In addition to those projects, we have a steady slate of FEED and limited notice to proceed work, where we have a high level of confidence in conversion to full prize awards in the next couple of years. Our prospect list is incredibly diverse, and we are not dependent on any one region or any one commodity to see significant growth in this business. Backlog for mining declined by approximately $1 billion in the quarter. That was due to the cancellation of a steel project in North America. Moving to infrastructure on Slide 4. The bipartisan bill continues to gain momentum and we are optimistic that it will focus on more traditional infrastructure projects, including roads and bridges, which we believe will provide some upside to Fluor and more importantly, funding certainty to our clients in the coming years. Importantly, we are starting to see shifts in contract structures and collaborative models are being applied to the infrastructure sector as well as other sectors that allow contractors to compete on capabilities and qualifications instead of solely on price. This is a positive development, and we're encouraged by this approach to risk mitigation. On a particularly promising note, we are seeing advisory institutions acknowledging the challenges encountered in executing public works projects. This has led to the development of more collaborative procurement models to support their public sector clients. Last week, we were notified by TxDOT that our COVID joint venture was selected to design, construct and maintain the 6.5 mile-long I-35E Phase 2 project here in Dallas. Our portion of the work will be booked in the third quarter. We're excited about this project and look forward to supporting TxDOT on this and other capital programs in the future. Regarding our legacy and infrastructure portfolio, I want to provide an update on the Gordie Howe bridge project and the $138 million charge we announced today. The project is experiencing significant COVID-related delays as well as overruns due to procurement and subcontractor cost growth. This charge includes additional reserves for delays and disruptions in the schedule. Fluor is not the lead operating partner on this contract. It's important to note that these cost growth factors may be at least partially recoverable under the contract. We expect that it will require several quarters to analyze recoverability and negotiate with our client before the accounting standards allow us to recognize incremental revenue for these amounts. While we are disappointed in the performance of the project, we believe we have a solid estimate on the cost at this point. Design is essentially complete. And we have procured approximately 85% of the materials required. We have been revising the forecast along the way and this contract was previously included in our zero margin projects and backlog. As a non-controlling partner in this JV, we continue to work with our partners to help them get this project into the best possible position. We have just under $1 billion in backlog remaining for this project and anticipate substantial completion by the end of 2020. Our other infrastructure projects continue to make solid progress, including the LAX People Mover, which crossed a significant milestone in early July when the joint venture placed the first four trusses for the elevated pedestrian walkway. Turning to Slide 5. In Advanced Technologies and Life Sciences, we are successfully wrapping up some of our large data center projects in Europe. We also see opportunities for semiconductor manufacturing facilities, both domestically and internationally. These projects are a mix of Brownfield and Greenfield, and provide a lot of opportunity for add-on work as these facilities grow. In Life Sciences, we continue to see a good list of opportunities as our world-class technology capabilities support our strategy of getting frontend work. We have been awarded a few frontend projects this quarter with the goal of converting them into EPCM contracts. Overall, we still see the EPCM markets as an area for growth in our business, and we are focused on deploying our teams on projects where we can grow our market share with contract terms and conditions that we find favorable. Please turn to Slide 6. In Mission Solutions, we experienced strong margins this quarter due to increased execution activity on DOE projects, higher than forecasted performance-based fees, and the release of COVID-19 cost reserves. The strong performance was somewhat offset by a decline in execution activity on army logistics and life support programs in Afghanistan and Africa. In June, we fully demobilized our people and successfully completed our assignment in Afghanistan after 13 years. At its peak, Fluor had 26,000 employees from 65 countries, speaking 39 languages at 76 sites and supporting over 100,000 troops. This included 191,000 meals prepared per day and the establishment of the first-ever biodiesel program for the U.S. military deployed overseas. Under this program, we produced over 0.5 million gallons of fuel for the bases. It's been a great honor for Fluor to support our troops in Afghanistan. And I want to thank our employees for their great work on this assignment, dating all the way back to 2009. We are now continuing to support the army through our LOGCAP V task order award in Africa. Next, please note that on the Raptor project, we have moved into the warranty period. This project is now essentially complete. Our major pursuits for the second half of this year in this group include the Savannah River management and operations contract extension and the Y12/Pantex management and operations contract in Tennessee and Texas. Moving to energy solutions on Slide 7. We had a particularly strong quarter due to certain favorable events, driving up our gross margin. This reflects the negotiations of change orders, scope increases and cost improvements across numerous projects. Furthermore, margins also benefited from the release of credit loss reserves after receiving payment on a significant longstanding past due receivable. These positive segment margin results were partially offset by a $20 million loss recognized on an embedded derivative, which is excluded from our adjusted EPS numbers. Turning to Slide 8. We remain pleased with the progress on our LNG Canada project in Kitimat. During the quarter, we saw significant easing of public health orders that had slowed progress earlier this year. And we are now fully staffed on site per our plan. In the second quarter, we achieved several major milestones. First, we drove the last of the Phase 1 plant piles. This program started in January 2020 and includes the installation of nearly 6,500 piles. If laid end to end, the piles would extend 130 miles. Secondly, the project's material offloading facility is now operational, receiving and unloading the first three major pieces of process equipment shipped via ocean-going vessel. These pieces of equipment for train one include the 345-ton, 50-meter-long main cryogenic heat exchanger and two pre-cooler units, each weighing over 280 tons. We are scheduled to erect these pieces this fall. The site has gone vertical with the steel erection of the non-process building, including the central control and administration buildings. During the quarter, we completed the LNG storage tank wall pours. The LNG tank roof and suspended deck raising is scheduled for next week. Module fabrication has commenced for all facets of the project across the Asia and European module fabrication centers. Preparation and planning have commenced for the first module deliveries from Asia, which are on target for Q4 2021. We have formalized a term sheet with our client, which outlines principles of cost and schedule relief related to delays including COVID, engineering and procurement impacts through February 26, 2021. We are targeting finalization of a formal variation this month. Please turn to Slide 9. We continue to enhance our energy transition portfolio and believe that Fluor will be a vital contributor to a lower carbon future. We are seeing success in several markets such as renewable fuels, carbon capture, clean hydrogen, battery chemicals, and asset decarbonization. First, in the renewables fuel market, Fluor is focused on Brownfield or revamp capabilities with a geographic focus in North America, where low carbon fuel standard credits are available, demand for liquid fuels continue and feedstock selection is broadly based. Next, in the carbon capture market, Fluor can perform projects with any technology globally. This includes our own proprietary technology for both pre-combustion and post-combustion, Fluor Solvent and Econamine FG+, respectively. We're also seeing further opportunities for carbon capture on new and existing LNG facilities. Our clean hydrogen efforts include both green hydrogen and blue hydrogen. Fluor is relying on its 50 years at the forefront of the gasification industry and has executed more than 30 pre-FEED and FEED projects. Fluor can differentiate in this market with our ability to act as integrator and OSBF contractor. Another energy transition market we are exploring is battery chemicals. We are expanding our lithium capabilities and are pursuing the growing market of electric vehicle battery production. In asset decarbonization, Fluor is leveraging our design experience for refineries and petrochemical facilities, including steam and electrical systems. We have global execution capabilities for conceptual frontend design through EPC for both electrification and energy efficiency projects. Aside from these markets, we are also pursuing projects in green ammonia, chemical recycling, bio-based chemicals, long duration energy storage, waste to energy conversion, and bio-LNG. Most of our energy transition work is in the United States and Europe. And based on our differentiated technical position, we continue to view growth in this area as a driver for increased revenue and earnings in the coming years. Now let's turn to NuScale, a related energy transition offering on Slide 10. For the first seven months of this year, NuScale has received $192 million in outside investments from JGC, GS Energy, Doosan, Samsung and IHI, among others. These infusions not only eliminate the need for Fluor to provide additional funding, but also accelerate NuScale’s path to commercialization and demonstrates third-party investor interest in NuScale’s business prospects. Additionally, we continue to have positive and productive conversations around nuclear power as a necessary base load clean energy source, both in North America and abroad. We believe that our NuScale product will become a vital part of a cleaner energy future. Before handing the call over to Joe, on Slide 11, I want to share a few observations as we head into the second half of the year. First, we expect to see some inconsistency or lumpiness in new awards as the optimism in post-pandemic capital spending from clients is partially offset by concerns about cost growth for labor and materials. We're also keeping a close eye on the impacts of the Delta variant of COVID as it relates to our exposure to global supply chains. While these dynamics may shift certain projects out in time somewhat and impact in the near term, there are longer-term trends in our business that I view as very positive. First, as mentioned in my infrastructure remarks, we are starting to see a better balance of risks sharing in contract structures. Projects are increasingly structured as pre-development agreements, where clients and contractors work together to identify and mitigate risks before bids are finalized. These collaborative models are being considered because clients are seeing contractors declining to bid on large projects as terms and conditions have shifted risk allocation too far away from the owner. Also, we continue to see a robust pipeline of study, pre-FEED, and FEED work to support future growth. We are currently working on, or have recently completed pre-EPC work that represents over $150 billion in total installed cost. Additionally, we are pursuing another 200 study and FEED projects, representing almost $200 billion in TIC over the next several years. So while we are seeing some near-term headwinds in '21 with new award lumpiness, we have considerable opportunity to capture projects that are in the pipeline and they're well suited for Fluor. Finally, regarding our cost savings initiative, we are making solid progress and have identified significant opportunities to improve processes and reduce costs, and create an organization that is competitive and fit for growth. Our various work streams are taking specific actions to ensure that our resources are tailored to what we need today. And we are establishing new protocols so we can efficiently scale as our markets ebb and flow. And now, I'll turn the call over to Joe for the financial update. Joe?

Joe Brennan, CFO

Thanks, David, and good morning, everyone. Please turn to Slide 12. For the second quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.32. In our press release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS to this adjusted number, which excludes the following after-tax items: $19 million of NuScale expenses, $14 million of embedded derivatives and associated taxes, $23 million of currency exchange losses and $1 million of investigation costs. Our diluted share count was 156 million for the quarter, up from 140 million in the first quarter. This includes the additional shares from the convertible preferred offering we completed in May. In the third quarter, we expect our diluted share count to be approximately 170 million, as the effects of the issuance will be for a full quarter. For the quarter and the year-to-date, the offering is anti-dilutive under GAAP due to the net loss, so common EPS and diluted EPS results are the same. However, in terms of guidance and results, we will discuss EPS including the aforementioned adjustments as well as using the larger diluted share count going forward for comparison purposes. Our financial statements will continue to conform to GAAP and we will provide the required reconciliation. But we will use the larger diluted share count for all periods as appropriate. I will walk you through that a little more clearly when we talk about guidance. Turning to Slide 13. Specific to our convertible preferred offering, we saw it as a necessary and positive step towards reinforcing financial discipline for the company. This offering allowed us to make a significant change in our net debt profile and not have to wait for proceeds from outstanding transactions that do not have an established closing date. With the expected debt retirement, our debt to total capitalization ratio will decline to below 40% by year-end, fulfilling the goal that we set on Strategy Day. The positive feedback we've received from the credit rating agencies and the credit providers shows that they're supportive of our efforts to drive Fluor to its historical leverage profile. This ensures we have the capital strength to maintain our position to bid and win the projects to support the growth within our stated strategy. Since completing the offer, we have retired $26 million in debt to date and anticipate additional substantial retirements by the end of 2021. Please turn to Slide 14. Our overall segment profit for the quarter was $67 million or 2.1% and included the $20 million charge for embedded derivatives and energy solutions and quarterly NuScale expenses of $19 million. Excluding these expenses and the effect of the embedded derivative improves our total segment profit margin to 3.3%, in line with our guidance for the year. Our ending cash balance was $2.7 billion and includes the unutilized proceeds from the convertible offering and the completion of a P3 sale in North America. Cash flow from operations was $77 million for the quarter and we expect cash flow generation to be positive for the second half of this year. Operating cash flow improved from the first quarter due to decreased funding for COVID costs on projects, lower cash requirements for G&A and tax payments, as well as a decline in working capital. We also completed the sale of AMECO North America in the second quarter and received cash proceeds of $71 million. We have shifted our focus to the divestiture of AMECO South America and Stork, and have confidence we will transact these divestitures prior to Q1 of 2022. We continue to consider small M&A opportunities, as previously discussed. But given current valuations in the market, we remain extremely selective. Our G&A expense was $31 million compared to $66 million last quarter. The decrease is due to the impact of stock price on our incentive compensation in the second quarter. Before I provide details about our outlook for the balance of the year, I want to provide a bit of insight into our current portfolio. Please turn to Slide 15. At the end of the quarter, our backlog contained $1.2 billion in projects that are in a zero margin or loss position. Outside of the Gordie Howe project, we have just over $200 million in backlog remaining for projects in a loss position, virtually all of which will complete by the end of 2022. All new awards since we tightened our bidding criteria two years ago remain profitable. Furthermore, looking at this slate of more recently awarded projects, project gross margin in all three segments is about 40 basis points higher than as-sold gross margin, which shows that our more disciplined approach to bidding is resulting in more predictable and profitable results. And now turning to Slide 16 for our outlook for the rest of 2021. Our previous adjusted EPS guidance of $0.50 to $0.80 per share was based on a share count of 140 million shares, and thus implied net income of $71 million to $113 million for 2021. Based on the performance we see in the businesses and considering the additional shares related to the convertible preferred offering, we are raising our adjusted EPS guidance to a range of $0.60 to $0.80, which correlates to an adjusted net income of $94 million to $128 million for the full year. Hitting this target is dependent on many of the currently identified projects being awarded in a timely fashion, and our ability to convert them into revenue in the next two quarters. As David mentioned, some projects may be delayed by owners until there's more certainty regarding near-term concerns around cost growth for labor and materials. We continue to monitor these headwinds through our supply chain group, and we are making sure the team remains aligned with our bidding process. In the appendix of our slide presentation today, we provide a reconciliation from previous guidance to current guidance and GAAP EPS to diluted adjusted EPS. Despite the anti-dilutive nature of the offering at this time, we will continue to report adjusted EPS assuming a fully diluted share count for measurability and will provide reconciliations as necessary. We are also adjusting our segment level guidance for the second half of the year and expect segment margins to be approximately 3% to 4% in Energy Solutions, which excludes any fluctuation from the embedded foreign currency derivative, 3% to 4% in Urban Solutions, and 2.5% to 3% in Mission Solutions. These margins also underpin Q3 and Q4 performance to support the updated diluted and adjusted EPS range of $0.60 to $0.80. On our Strategy Day in January, we provided long-term 2024 EPS guidance of $3.00 to $3.50. This range was provided using our 2020 share count of 140 million shares. Adjusting for a diluted share count of 170 million shares in 2024, we are updating our long-term EPS guidance to a range of $2.50 to $2.90. To reinforce, we are not changing our income assumptions, just adding to the denominator.

Operator, Operator

Thank you. And we'll go first to Steven Fisher with UBS.

Steven Fisher, Analyst

Thanks. Good morning, guys. Just wondering if you could talk a little bit more about the inflation that you're seeing? How broad is it? Is it more labor or materials? And what are your customers telling you about what they would have to see to move some of these projects forward?

David Constable, CEO

Good morning, Steve. It's good to be with you. In the mining group, we're currently double-checking our estimates to ensure that pricing remains stable. These projects are long-term, so we need to keep a close eye on any potential increases in labor and material costs due to inflation. For our ongoing projects, I can confidently say we're in a solid position. There are no issues with reimbursable cost projects, and we've also reviewed our fixed price contracts in the backlog and found them to be in good shape. It appears that the recent COVID-related impacts are easing, which is reducing inflationary pressures. Right now, some of these projects are facing timing challenges, and we just need a bit more time to gain the necessary assurance. Joe, could you also share your thoughts on inflation?

Joe Brennan, CFO

Yes. In certain of our contracts too, specifically our largest award in quarter one, we have provisions in the contract for extraordinary inflation adjustments that are allowed to the contractor. So yes, I would concur with David. I think we've accounted for a significant portion of that in our current backlog. And clearly as we proceed and bid on work moving forward, we’ll make sure that we're working to account for any of those impacts.

David Constable, CEO

Steve, we’re not seeing any project cancellations. These prices are ensuring that the internal rate of return required by clients before making final investment decisions is solid, and they are currently doing that type of scenario planning.

Steven Fisher, Analyst

Got it. Thanks.

Joe Brennan, CFO

To clarify, this is mainly just in mining. You're not seeing this broadly across the portfolio.

David Constable, CEO

Yes, that's where it's most noticeable right now. As we mentioned previously, mining is a key focus for us. When considering our growth markets, mining stands out, and I would also include chemicals, but primarily it's mining where the teams have been raising concerns with me about that issue.

Steven Fisher, Analyst

Okay. And just a quick follow-up on Gordie Howe. I guess just how confident should investors be that there won't be more charges here? What's in the 15% of materials not bought out yet? It sounds like it's a lost project. So, how much room is there for error on construction? And I guess the bigger picture question is, it's a legacy project, but what would be different under the current system?

David Constable, CEO

Well, under the current system, we would not have bid that project. It would not have gotten through our stringent pursuit criteria. So that's the first thing.

Steven Fisher, Analyst

Okay.

David Constable, CEO

This is a legacy project that was awarded in September 2018 and has zero margin. We are not leading this project, which is a requirement we take seriously, and it's not our preferred way to execute projects. It is a design-build project. Currently, we're 40% involved as a non-operating partner. In terms of construction, we're performing a significant portion ourselves; specifically, about 70% of the bridge work in the Michigan Interchange is self-performed, while approximately 95% of the work at the U.S. and Canadian ports of entry is subcontracted. Overall, I believe we are in a solid position. During the second quarter, we identified a notable increase in procurement and subcontractor cost growth. Our teams have been diligently reviewing forecasts from our partner to ensure they are reasonable, and I believe we have a sound estimate now. Additionally, there is potential for revenue recovery as we strengthen our claims on the project. Regarding our $1.2 billion backlog involving zero margin projects, we have effectively managed these fixed-price contracts. Notably, the Gordie Howe project accounts for about $968 million of that backlog, and we are actively working through these challenging projects, with this being the last major one for which we have a reliable estimate. The design is nearly complete at 99%, and there is minimal procurement left to address within that remaining 15%. Overall, I think we are on track, with approximately 20% of the entire project completed. Now, I’ll turn it over to Joe to discuss our forecasting principles and any cash flow impacts.

Joe Brennan, CFO

Yes. First of all, take the cash flow. We're sitting on a fairly robust advance on that project. So we would not see really any of the cash flow impacts from the current financial position until the '23 timeframe. What we've been able to kind of instill with the new kind of guiding principles that we've implemented within the company is we identified the costs first and are still in the process of identifying what our entitlements are under the contract relative to COVID and client delays and what that may mean in terms of revenue and until we have that perfected and we feel comfortable in our position. We took the cost when we knew the cost and we'll look at the variable consideration. We have put a significant claims team together, and they're all around that project to develop that potential recovery. But until they do their work and until we receive their feedback, we won't know what that looks like.

Steven Fisher, Analyst

I appreciate the color. Thanks very much.

David Constable, CEO

Thanks, Steve.

Operator, Operator

We'll go next to Andrew Kaplowitz with Citi.

Andrew Kaplowitz, Analyst

Good morning, guys.

David Constable, CEO

Hi, Andy.

Joe Brennan, CFO

Good morning.

Andrew Kaplowitz, Analyst

David, I just want to follow up on the project environment in the sense that in the past, you said book to bill could get closer to 1 by the end of the year. You just talked about mining customers taking their time. But given that 20 billion of mining prospects that you have, obviously commodity prices have gone through the roof on the metal side. Are discussions starting to heat up at this point? And then do you also see bigger energy solution projects starting again, at least discussions, so you get to that higher book to bill by the end of the year? Or is that really sort of pushed out to '22 now?

David Constable, CEO

We had a strong first quarter with some pleasant surprises in new awards. While we experienced a slight dip in Q2, it was a close call, and Q3 awards as of the end of July match the total awarded in Q2. With two months left in Q3, we've already reached the same level we achieved in Q2, which is encouraging. As we've mentioned previously, we expect the latter half of 2021 to see an increase in new awards and this trend should continue into 2022. I believe Q3 will show improvement in reaching a book-to-bill ratio of 1 to 1, although we may not achieve that until 2022. Currently, we have around 160 billion in-house related to FEED and study work, with an additional couple of hundred billion in frontend work we aim to convert over the next six quarters, primarily in the chemicals and mining sectors. We've identified 20 billion in mining work, and including supplementary studies, the total is 28 billion. We're also pursuing 64 billion in FEED work related to mining. In chemicals, we have 44 billion in frontend work and are targeting 55 billion in prospects over the next six quarters. Traditional oil and gas accounts for 30 billion of in-house FEED work, with another 46 billion in pursuit. LNG is particularly strong, with 53 billion in-house and 12 billion upcoming. Regarding energy transition, we have 11 billion currently in frontend work and are considering 16 billion in opportunities for 2022. When evaluating the near-term prospects for EPC and EPCM projects over $50 million, we find the total is just under 40 billion, including 9 billion from Energy Solutions, 11 billion from Mission Solutions, and 17 billion from Urban Solutions. Overall, I feel optimistic about the new awards arriving, especially in 2022. The markets are moving in our direction, and as the uncertainty surrounding COVID and its variants lowers, it's just a matter of time before we see improvements.

Joe Brennan, CFO

Well, I was just going to add, Andy, to David's point, we're not seeing cancellations. We're just seeing a significant amount of additional due diligence being done relative to market conditions and COVID. So it may push from Q4 into Q1. But again, the positive thing is that we're not seeing those cancellations.

Andrew Kaplowitz, Analyst

Very helpful color, guys. And then just can you give more color into the positive change orders and cost improvements that you recorded this quarter within Energy Solutions? I know you mentioned they were on numerous projects. So why all of a sudden did you record such a big positive revision this quarter? And then you mentioned you increased the underlying margin of the business. Is that a function of just LNG Canada ramping, better underlying execution, something else? Any more color there would be helpful?

David Constable, CEO

Yes. There's a lot of puts and takes in there. I don't want to get into the specific projects necessarily, but there's been some additional scope that was added to a particular project. We have come to terms on a number of different COVID-related activities. And I think that's driving a significant portion of that offset by the embedded derivative. And then you include the fact that an age receivable from a client in Mexico that was nominally two and a half years old was received during the quarter are all very positive outcomes for us.

Andrew Kaplowitz, Analyst

I appreciate it, guys.

David Constable, CEO

Thanks, Andy.

Operator, Operator

We'll go next to Sean Eastman with KeyBanc Capital Markets.

Sean Eastman, Analyst

Hi, guys. Thanks for taking my questions.

David Constable, CEO

Hi, Sean.

Joe Brennan, CFO

Good morning, Sean.

Sean Eastman, Analyst

Good morning. So, David, you're talking some big numbers in terms of the pursuit pipeline and pre-EPC activity levels. Historically, what percentage of pre-EPC work has translated to EPC bookings? I'm just struggling with those numbers relative to CapEx updates we've seen from the project sponsors. So I'm just trying to reconcile that. I understand how likely this pursuit pipeline is to hit.

David Constable, CEO

Yes. Obviously, not everything in study and pre-FEED and even in FEED come all the way through the screens, right, because of product economics, Sean. So point taken. And that would be a tough question to answer specifically. When we're in a full FEED and working economics with the clients, then we could see upwards of 30%, 40% conversion of that. But I haven't broken the numbers down for you between study, pre-FEED and FEED. So that would be a more detailed analysis that we'd have to take a look at.

Joe Brennan, CFO

I wanted to add to that, Sean. Looking at it from an industry perspective, those conversion rates would appear different. For instance, in the mining sector, it tends to be around 90%. However, I was providing an average. The 20 billion solid in mining is expected to achieve a much higher conversion based on our market position. But again, I was giving you an average across all 11 business lines.

Sean Eastman, Analyst

Okay, fair enough. And I just wanted to ask on Mission Solutions, a lot of moving parts there as well, just with LOGCAP transition, some projects completing, I feel like we've seen maybe one or two DOE prospects go to competitors. I could be wrong there. But is there kind of an air pocket over the next couple of quarters here? What's the revenue growth trajectory like in Mission Solutions?

David Constable, CEO

Yes, we are excited about Mission Solutions and progressing within the value chain by focusing on management and operation contracts. While there is a dip due to the conclusion of LOGCAP IV in Afghanistan, which was a significant program, our team is concentrating on filling that gap by advancing up the value chain. I want to highlight that Q3 has already achieved new award levels comparable to Q2, largely thanks to substantial Mission Solutions awards that will be announced soon. We are making substantial strides with the Department of Defense, which could significantly enhance Mission Solutions' revenue growth. Overall, we are optimistic about the future of Mission Solutions regarding revenue and earnings throughout the planning period. Additionally, we recently secured a notable multi-contract award with the Navy, which involves spending $5 billion annually for the next several years, and we will be engaged in a program that provides technical solutions and engineering management support. Thus, I am quite optimistic about Mission Solutions at this time.

Joe Brennan, CFO

I was just going to add that it's hard to replace a LOGCAP at the end of the day and the revenue that's flowing through that. But the notable award that's coming in, in Q3 and there are some very significant awards that we're expecting to have announced at the end of this year. And as you know, in the DOE space, these awards are $15 billion to $20 billion type awards that we feel like we have very good opportunities, and we're very well positioned. So it will see a bit of a smile relative to revenue recognition. But we believe that you'll see a fairly significant growth in backlog.

David Constable, CEO

If you look at the spending, the Department of Energy has spent 43 billion and will be spending over 40 billion annually, while the Department of Defense is spending significantly more, around 750 billion. There is a lot of support and value that we can provide to both of those agencies and others.

Sean Eastman, Analyst

Okay. All right, thanks. I'll turn it over.

Operator, Operator

We’ll go next to Jamie Cook with Credit Suisse.

Jamie Cook, Analyst

Hi. Good morning. I have two questions. First, could you share your observations regarding Stork as the economy improves and conditions normalize? Are we expecting any acceleration in business, and if so, how might that influence the timing or valuation of the divestiture? Secondly, regarding the implied guidance for the second half of the year for Mission Solutions, should we assume that the first half is enough to reach your target for the second half? It seems to suggest margins in that business may decrease in the latter half of the year, so I'm curious if I am overlooking something. Additionally, for Energy Solutions, while I understand we're accounting for the embedded derivative, if we compare the first half's run rate to your full-year guidance, it suggests margins could be around 2%. I want to ensure I'm correctly factoring in the adjustments or omissions. Thank you.

David Constable, CEO

Thanks, Jamie. Good morning. I'll ask Joe to comment on Mission Solutions margins in the second half and also on Energy Solutions regarding the embedded derivative. The process with Stork is progressing well, with over 50 interested parties having signed NDAs. There's strong interest in Stork. However, from an awards perspective, they are facing challenges due to COVID uncertainty. It's important to note that Stork operates internationally, and COVID is affecting other parts of the world more significantly than the U.S. at this time. They are still experiencing some softness because of this uncertainty. However, according to the President of Stork, they anticipate stronger performance in new awards later this year. Overall, the process is going smoothly and we are looking forward to that transaction later in the year.

Joe Brennan, CFO

Yes, I can provide an update on Stork. There is a surprisingly large number of individuals in the data room today, indicating a significant level of interest. For Mission Solutions, following the LOGCAP and certain unique events we observed in Q2 related to COVID releases and earned incentives, we anticipate that the range will revert to its historical averages between 2.5% and 3% moving forward. Regarding Energy Solutions, if we exclude the fluctuations for the quarter, we would have been at about 3.7% on a normalized basis. Looking ahead, we are increasing the range from 3% to 4%.

Jamie Cook, Analyst

Okay, that's helpful. And then just one last question. I guess with a lot of people making strategic decisions to sort of exit sort of the EPC business and understanding you have good prospects ahead, even though they're slightly delayed. Do you think your win rate potentially in some of these markets would be higher than what we would see in a normal cycle just with you staying committed to the business and a lot of your peers walking away? And is that reflected in your sort of long-term EPS targets, a higher potential win rate?

David Constable, CEO

Jamie, from a win rate perspective, we did not adjust that upward for our earnings power through the period. I will say we've talked about these contracting models coming to us favorably, coming more favorably to us in the different businesses. Our pursuits right now, we took a look at it with the Board this week, 85% of our pursuits are now reimbursable contracts with incentives, so really much better place to be as far as their strategy to go after fair and balanced contract terms and commercial terms. So, I think that's telling. And the thing we need to be careful of is as these markets all come back and really pick up that we need to be very disciplined that we don't jump all over the first few and make sure that we keep our margins where they need to be. So we’re just cautioning the teams to be very measured and just follow our processes that we’ve put in place and drive Fluor value and getting paid for the value that we're bringing to all these projects. So, I guess, I'd say there's potential upside to what we're looking at as far as win rates, because we are differentiated. We bring all that frontend capability that I talked about, for example, in energy transition that you can just stay with us and we can design and build and commission your plants for all of these customers that all are focused on net zero across our 11 business lines.

Jamie Cook, Analyst

Okay. Thank you. That's very helpful. I appreciate it.

David Constable, CEO

Thanks, Jamie.

Operator, Operator

And our last question comes from Michael Dudas with Vertical Research.

Michael Dudas, Analyst

Hi. Good morning, everybody.

David Constable, CEO

Hi, Michael.

Joe Brennan, CFO

Good morning, Michael.

Michael Dudas, Analyst

David, could you provide additional insights on NuScale? There's certainly been significant progress in the first half regarding investment and project development opportunities. What milestones should we anticipate in the second half of the year? Considering the various funding initiatives and proposals related to nuclear and clean energy coming out of Washington, do you see this as beneficial for SMR for Fluor, or is it still too early to tell given your leadership position and design approval from the NRC?

David Constable, CEO

Yes, NuScale is very exciting and it continues to gain momentum, Mike. Good morning. We've had a strong first half and up until July, thanks to various third-party investments. Guggenheim is now assisting us in exploring options to reduce Fluor’s equity and increase value for Fluor shareholders. Everything is progressing as planned, and we are seeing interesting developments aimed at achieving a minority ownership, while still retaining exclusive rights to manage all small modular reactor projects both in the U.S. and internationally. I must mention that international activity has significantly increased and could potentially outpace the U.S. in terms of progress. The NRC approval from last year has really heightened interest in NuScale as a leader in small modular reactor technology, attracting considerable attention from governments and customers outside the U.S., which is very encouraging. Regarding the Department of Energy, I had a productive conversation with Secretary Granholm a couple of weeks ago. Recent discussions from Washington indicate that there is significant focus on a legislative package aimed at supporting new small modular reactors, with about 6 billion allocated for decommissioning nuclear facilities and another 6 billion designated for the SMRs themselves. This is very positive. From what we're hearing out of Washington, there is strong support for NuScale as we move towards a lower carbon future that is needed globally. That summarises the latest on NuScale, Mike.

Michael Dudas, Analyst

Yes. Just one follow up on that. Is there any additional investment expected or what needs to be triggered in the next several weeks, months or quarters for your NuScale to get to the level where monetization could happen, or there's a breakout and some new business development opportunities are accelerating some of the potential that NuScale? Is there anything that we should think about here as we move through the second half of the year?

David Constable, CEO

I think these are very long projects. We’re certainly working with U.S. very closely on the standard design of their facility, right, and that's moving along. As well as we're in discussions with very confidential customers in deployment of multiple SMRs to support their low carbon initiatives, again, domestically and internationally. So I think that's something to keep an eye on. In fact, some of those confidential projects feature in Guggenheim’s financial modeling and analysis to take NuScale forward with respect to valuation. And so that's I think a very positive development. So just more to come and stay tuned I guess I'd say.

Michael Dudas, Analyst

Excellent. Thank you, David.

David Constable, CEO

Thanks, Mike.

Operator, Operator

And that concludes today's question-and-answer session. At this time, I'd like to turn the conference back to David Constable for closing remarks.

David Constable, CEO

Thanks, operator, and many thanks to all of you for participating on the call today. I'll say the Fluor management team remains focused on achieving our strategic goals and continues to have positive conversations with all of our stakeholders, especially our customers, and as we continue to improve our financial and operational position. So until next time, we appreciate your interest in Fluor Corporation. Thanks again for your time today and please stay safe.

Operator, Operator

And that concludes today's conference. Thank you for your participation. You may now disconnect.