KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2013. The filing text corresponds to 2013 Q1, although the request metadata identifies 2012 Q1. The financial statements are unaudited.
Business Context and Reporting Period
KBR is a global engineering, construction and services company serving energy, hydrocarbons, government services, minerals, civil infrastructure, power, industrial and commercial markets. Reportable segments are Hydrocarbons; Infrastructure, Government and Power; Services; and Other.
Management cited continued long-term energy-project opportunities, increased Services activity, declining Middle East government logistics activity, and pressure in minerals and certain infrastructure markets. The company expects major projects including Ichthys and Gorgon LNG to contribute materially, while Escravos GTL and Skikda LNG approach completion.
Financial Performance and Liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1.859 billion | $2.001 billion | Down 7% |
| Operating income | $133 million | $112 million | Up 19% |
| Operating margin | 7.2% | 5.6% | Up 160 basis points |
| Net income | $97 million | $98 million | Down 1% |
| Net income attributable to KBR | $88 million | $91 million | Down 3% |
| Diluted EPS | $0.59 | $0.61 | Down 3% |
| Cash flow from operations | $(93) million | $(107) million | Improved by $14 million |
| Capital expenditures | $20 million | $16 million | Up $4 million |
| Cash and equivalents at period end | $904 million | $837 million | Prior-year comparison |
Net income attributable to KBR represented approximately 4.7% of revenue, compared with approximately 4.5% in the prior-year quarter. The effective tax rate increased to approximately 23% from 9%, primarily reflecting lower discrete tax benefits; the adjusted effective tax rate was approximately 28% versus 27%.
Cash declined by $149 million during the quarter, to $904 million, due to operating, investing and financing cash uses and a $21 million adverse foreign-exchange effect. Approximately $197 million of cash was held by consolidated joint ventures and was restricted to project activities. Of the $707 million of non-joint-venture cash, approximately $543 million was held in foreign subsidiaries.
At March 31, 2013, KBR had no borrowings under its $1 billion revolving credit agreement, but had $212 million of letters of credit issued under that facility. Total letters of credit outstanding were $706 million, supported by approximately $2.2 billion of committed and uncommitted capacity. Nonrecourse project-finance debt totaled $88 million. KBR reported compliance with its credit agreement covenants.
Material Changes Versus the Prior Comparable Period
- Hydrocarbons revenue declined 15% to $947 million, primarily because of lower activity and near-completion of Escravos GTL and Skikda LNG projects. Segment operating income increased 41% to $148 million.
- Infrastructure, Government and Power revenue declined 21% to $407 million and segment operating income declined 31% to $27 million, reflecting lower government logistics, defense-support and infrastructure activity.
- Services revenue increased 39% to $485 million, driven principally by Canadian construction and U.S. construction awards and higher activity. Segment operating income increased 50% to $18 million.
- Total segment operating income increased to $200 million from $166 million. The improvement was partly offset by a $15 million labor-cost absorption expense, compared with $1 million of income in the prior year.
- General and administrative expense declined to $52 million from $55 million.
- Backlog declined to $14.215 billion from $14.931 billion at December 31, 2012. Hydrocarbons backlog was $8.676 billion, IGP backlog was $2.534 billion and Services backlog was $2.068 billion. Approximately 49% of backlog was expected to be executed within one year.
- Backlog was 43% fixed-price and 57% cost-reimbursable. Unfunded government orders represented $250 million of backlog.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific consolidated earnings or revenue guidance. Management stated that internally generated cash was expected to support day-to-day operations for at least the next 12 months and that letters-of-credit capacity was adequate for the same period.
- A $38 million favorable revision to contract estimates increased Hydrocarbons segment operating income, primarily on two Gas Monetization projects.
- The company recognized approximately $5 million of discrete net tax benefits in Q1 2013, compared with approximately $20 million in Q1 2012.
- KBR reported $129 million of claims and $57 million of unapproved change orders on percentage-of-completion contracts. Claims included $109 million of recognized revenue related to an LNG project.
- Government-contract claims included in receivables totaled $213 million and were considered probable of collection by management.
- DCAA Form 1 notices recommended suspension of approximately $283 million of prior-year contract costs; $138 million had been withheld from KBR billings. The company also had $99 million of government demand letters for disallowed costs that it disputed.
- Significant government-contract matters include disputes involving private security, containerized housing, dining facilities, transportation costs and construction services. Outcomes could affect cash flow, revenue recovery and future government contracting opportunities.
- The company disclosed a new African Development Bank investigation related to the Bonny Island project. The financial impact and potential debarment consequences could not yet be determined.
- The PEMEX arbitration receivable remained classified as a long-term receivable, with collection timing uncertain. KBR also had approximately $80 million of performance bonds exposed to potential claims by PEMEX.
- The company disclosed approximately 50 burn-pit lawsuits, sodium-dichromate litigation involving approximately 170 plaintiffs, and other government-contract litigation. Management generally assessed loss likelihood as remote, but the filing notes a jury verdict of approximately $10 million in actual damages and $75 million in punitive damages in an Oregon sodium-dichromate case, subject to post-verdict proceedings and appeals.
- Remaining goodwill of $85 million at the Minerals reporting unit remained subject to impairment risk if market conditions or projected results deteriorated.
Most Important Facts to Verify
- Whether favorable contract-estimate revisions, particularly the $38 million Hydrocarbons benefit, are recurring or project-specific.
- Recoverability and timing of the $213 million in government-contract claims and the $129 million in project claims.
- Resolution of DCAA Form 1 disputes, withheld billings and government demand letters.
- Collection of the PEMEX arbitration receivable and potential exposure related to approximately $80 million of performance bonds.
- Execution risk in the $14.215 billion backlog, including fixed-price exposure and concentration in large LNG and government projects.
- Liquidity availability after considering restricted joint-venture cash, letters of credit, working-capital requirements and negative quarterly operating cash flow.
- Potential financial, regulatory or debarment consequences of the African Development Bank investigation and other government-contract proceedings.