KBR, Inc. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for KBR, Inc., a global engineering, construction, and services company, for the period ended June 30, 2008. KBR operates through six business units: Government and Infrastructure (G&I), Upstream, Services, Downstream, Technology, and Ventures. The company was separated from Halliburton in April 2007. As of July 28, 2008, there were approximately 169.8 million shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Total Revenue | $2,658 | $2,152 | $5,177 | $4,179 |
| Operating Income | $90 | $65 | $244 | $110 |
| Net Income | $48 | $140 | $146 | $168 |
| Diluted EPS | $0.28 | $0.83 | $0.86 | $0.99 |
| Cash and Equivalents | $1,556 (as of June 30, 2008) | |||
| Operating Cash Flow | N/A | ($284) | $394 | |
| Backlog | $12.6 billion (as of June 30, 2008) |
Note: Net income for the three and six months ended June 30, 2007 included significant income from discontinued operations ($90 million and $94 million, respectively), which were absent in 2008.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 24% year-over-year for the six months ended June 30, 2008, driven primarily by the G&I and Upstream segments. G&I revenue rose 15% due to higher volume in Middle East operations (LogCAP III contract), while Upstream revenue surged 49% due to increased activity in Gas Monetization projects.
- Profitability: Operating income for the six months ended June 30, 2008, more than doubled to $244 million from $110 million in the prior year. This was significantly aided by a $51 million gain from a favorable arbitration award related to the PEMEX EPC 28 project.
- Cash Flow: Operating cash flow turned negative, using $284 million in the first half of 2008 compared to providing $394 million in the same period in 2007. The decline was primarily due to a $290 million cash outflow on the Escravos project and pension contributions, offsetting collections from accounts receivable and the PEMEX award.
- Discontinued Operations: The prior year included significant gains from the sale of the Production Services group and the DML joint venture, which are not present in the current period.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions: On July 1, 2008, KBR acquired BE&K, Inc. for $550 million in cash. Smaller acquisitions of Turnaround Group of Texas and Catalyst Interactive were completed in April 2008.
- Project Losses: The Skopje Embassy project in Macedonia incurred an additional $15 million in losses during the six months ended June 30, 2008, bringing total estimated losses to approximately $54 million. The project is 73% complete.
- Legal and Contingencies:
- FCPA Investigations: Ongoing investigations by the SEC and DOJ regarding the Bonny Island project in Nigeria and potential Foreign Corrupt Practices Act violations. Halliburton has agreed to indemnify KBR for fines and penalties, but non-monetary consequences (e.g., debarment) remain a risk.
- Government Contract Disputes: Significant disputes exist regarding the LogCAP III contract, including a $40 million jury award to a subcontractor (ASCO) which KBR believes is billable to the U.S. government. Additionally, the DCAA has questioned costs related to security, dining facilities, and containers, with approximately $55 million of costs currently suspended.
- PEMEX Arbitration: While a $51 million gain was recognized for EPC 28, collection is not expected within 12 months due to legal challenges by PEMEX in Mexico.
- Liquidity: KBR maintains a Revolving Credit Facility with a capacity of $890 million (expanded to $930 million in July 2008). Approximately $500 million of this capacity was utilized for letters of credit as of June 30, 2008. The company is pursuing further expansion of credit capacity to support future project guarantees.
Key Facts for Investor Verification
- FCPA Indemnity Scope: Verify the specific terms of Halliburton's indemnification regarding the FCPA investigations, particularly regarding non-monetary penalties like debarment which are not covered.
- LogCAP III Funding: Monitor the resolution of the $37 million in unbilled costs under LogCAP III due to funding allocation issues and the status of the $40 million ASCO jury award recovery from the U.S. government.
- Skopje Embassy Losses: Track the final cost estimates for the Skopje Embassy project, as additional losses could be incurred if schedule recovery plans fail.
- PEMEX Collection: Assess the timeline and likelihood of collecting the $116 million award from PEMEX for the EPC 28 project, currently classified as a long-term receivable.
- Working Capital Trends: Review the continued cash outflow related to the Escravos project and the impact of the BE&K acquisition on future liquidity and leverage ratios.