KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The filing compares results with the three months ended March 31, 2011; this differs from the request metadata identifying “2011 Q1.” KBR is a global engineering, construction and services company serving hydrocarbons, infrastructure, government, power, minerals and industrial markets.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $2.001 billion | $2.321 billion | Down 14% |
| Operating income | $112 million | $144 million | Down 22% |
| Net income | $98 million | $117 million | Down 16% |
| Net income attributable to KBR | $91 million | $105 million | Down 13% |
| Diluted EPS | $0.61 | $0.69 | Down $0.08 |
| Cash flow from operations | $(107) million | $225 million | Declined $332 million |
| Cash and equivalents | $837 million | $966 million at Dec. 31, 2011 | Down $129 million |
Operating margin was approximately 5.6%, compared with 6.2% in the prior-year quarter. The effective tax rate was approximately 9%, versus 16% in Q1 2011; Q1 2012 included approximately $20 million of discrete tax benefits. Excluding discrete items, the effective tax rate was approximately 27%, compared with 32% in Q1 2011.
At March 31, 2012, total assets were $5.536 billion, total liabilities were $2.998 billion and total shareholders’ equity was $2.538 billion. KBR reported $100 million of non-recourse project-finance debt held by a consolidated variable-interest entity. The company had no advances outstanding under its $1 billion revolving credit agreement and had $219 million of letters of credit issued under that agreement.
Material changes versus the prior comparable period
- Hydrocarbons: Revenue increased 7% to $1.116 billion and operating segment income increased 6% to $105 million, led by Gas Monetization and the newly awarded Ichthys LNG project.
- Infrastructure, Government and Power: Revenue declined 39% to $518 million and segment income declined 36% to $39 million, primarily because LogCAP III operations in Iraq effectively ended in December 2011. Q1 2011 also included $16 million of LogCAP III award fees that did not recur.
- Services: Revenue decreased 12% to $348 million and segment income decreased 8% to $12 million, mainly from completed or reduced activity on U.S. construction and maintenance projects.
- Corporate costs: General and administrative expense increased to $55 million from $44 million.
- Liquidity and cash flow: Operating cash flow changed from $225 million of cash provided to $107 million used, primarily because of project working-capital timing, increased unbilled receivables and lower advance billings.
- Backlog: Total backlog increased to $15.751 billion from $10.931 billion at December 31, 2011, primarily due to approximately $5.6 billion of Ichthys LNG awards. Approximately 44% was expected to be executed within one year; 38% was fixed-price and 62% cost-reimbursable.
Outlook, risks, contingencies and unusual items
- Management expects U.S. and U.K. contingency-operations spending and related Middle East logistics work to continue declining over the next several years, while citing opportunities in Europe and other Middle East markets.
- Management described improving long-term hydrocarbons demand, including LNG, offshore oil and gas, petrochemicals, fertilizers and related technology projects.
- Cash included $194 million held by consolidated joint ventures that was restricted to project activities and was not generally available for corporate needs.
- KBR had approximately $2 billion of committed and uncommitted letter-of-credit capacity and had used $708 million at March 31, 2012. Management stated that available capacity was adequate for the next twelve months.
- Open DCAA Form 1 matters recommended suspension of approximately $352 million of prior-year contract costs, of which approximately $146 million had been withheld from current billings. The company also reported $98 million of customer demand letters for disallowed costs that it believes it is not legally obligated to pay.
- Unapproved government-contract claims totaled $192 million and had been recognized as revenue because management considered collection probable.
- Probable unapproved claims and change orders on percentage-of-completion contracts totaled $94 million, including $89 million of claims. KBR recognized $59 million of additional revenue related to customer-caused delays on an LNG project.
- KBR had not accrued approximately $11 million of potential liquidated damages associated with several projects.
- A $201 million liability related to the Barracuda-Caratinga failed-bolts arbitration was offset by a $201 million indemnification receivable from Halliburton. KBR was challenging the arbitration award.
- PEMEX arbitration proceeds remained a long-term receivable; the timing and ultimate collection remained uncertain. KBR also had approximately $80 million of performance bonds associated with the project.
- Several government-contract, False Claims Act, employee, personal injury, burn-pit, sodium dichromate and subcontractor matters remained pending. For several matters, KBR stated that the outcome or potential loss could not be estimated; no amounts had been accrued for certain listed cases.
- The filing stated that there were no material changes to previously disclosed risk factors. Management reported effective disclosure controls as of March 31, 2012.
Important facts for investors to verify
- Confirm the applicable period: the filing is for Q1 2012, not Q1 2011.
- Assess whether the large backlog increase, particularly the Ichthys LNG award, converts into revenue and cash flow as expected.
- Monitor the continued decline of LogCAP-related revenue and the company’s ability to replace that work.
- Reconcile reported cash with restricted joint-venture cash and evaluate the effect of negative operating cash flow.
- Track DCAA audits, withheld billings, unapproved claims and related government-contract litigation for potential cash or earnings impacts.
- Review the collectability and timing of the PEMEX receivable and the Halliburton indemnification receivable.
- Separate recurring tax performance from the $20 million of Q1 2012 discrete tax benefits.
- Evaluate fixed-price contract exposure, unaccrued liquidated damages and project cost-to-complete estimates.