KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. The request metadata identifies “2014 Q1,” but the filing is the 2015 first-quarter Form 10-Q and compares results with the three months ended March 31, 2014.
Business context
KBR is an engineering, procurement, construction and services company serving global hydrocarbons markets and international government customers. Following a December 2014 strategic review, the company reorganized into Technology & Consulting, Engineering & Construction, Government Services, Non-strategic Business and Other segments. Businesses intended for sale or exit are included in Non-strategic Business.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1,436 million | $1,633 million | Down 12% |
| Gross profit | $70 million | $39 million | Up 79% |
| Gross margin | 4.9% | 2.4% | Up 2.5 percentage points |
| Operating income | $64 million | $10 million | Up $54 million |
| Operating margin | 4.5% | 0.6% | Improved |
| Net income attributable to KBR | $44 million | $(43) million | Returned to profitability |
| Diluted earnings per share | $0.30 | $(0.29) | Improved |
| Cash flow from operations | $(108) million | $(17) million | Greater use of cash |
Equity earnings from unconsolidated affiliates increased to $35 million from $31 million. General and administrative expense declined to $39 million from $60 million. Other non-operating income was $6 million versus expense of $9 million, primarily reflecting foreign-exchange gains.
Cash and equivalents were $758 million at March 31, 2015, down from $970 million at December 31, 2014. The $212 million decrease included $108 million of operating cash use, $75 million of financing cash use, $28 million of unfavorable foreign-exchange effects and $1 million of investing cash use. Domestic cash was $181 million, international cash was $499 million and joint-venture cash was $78 million; some international and joint-venture cash is restricted or not readily available for general corporate purposes.
KBR had no cash borrowings under its $1 billion revolving credit agreement and had $165 million of outstanding letters of credit under that facility. Total outstanding letters of credit were $605 million, supported by approximately $2.1 billion of committed and uncommitted capacity. Nonrecourse project debt totaled $69 million at March 31, 2015. Management stated that existing cash, operating cash flows and available credit and surety capacity were sufficient for at least the next 12 months.
Backlog declined to $10.287 billion at March 31, 2015 from $10.859 billion at December 31, 2014. Approximately 50% was expected to be executed within one year, 37% was attributable to fixed-price contracts and 63% to cost-reimbursable contracts.
Material changes versus the prior comparable period
- Revenue decreased primarily because major LNG and gas-to-liquids projects neared completion, U.K. government support activity in Afghanistan declined, and Technology & Consulting equipment and consulting awards were lower.
- Profitability improved substantially because Canadian pipe fabrication and module assembly losses and other project charges were lower or did not recur, overhead was reduced, and Non-strategic Business charges declined.
- Engineering & Construction revenue fell 14% to approximately $1.0 billion, while gross profit rose 90% to $55 million.
- Government Services revenue fell 17% to $155 million and gross profit moved to a $4 million loss from $5 million of profit, reflecting reduced military support activity.
- Non-strategic Business revenue rose 6% to $232 million and gross profit improved to less than $1 million from a $10 million loss.
- Operating cash use increased substantially, partly because of working-capital movements, $36 million of net derivative settlements and $11 million of pension contributions.
- Financing cash use included $40 million to acquire a noncontrolling interest, $16 million of share repurchases, $12 million of dividends and $7 million of distributions to noncontrolling interests.
Guidance, outlook, risks and unusual items
- Management expects no major LNG EPC award until early 2016 or later, although it continues to pursue LNG, refining, petrochemical and chemical opportunities.
- KBR is targeting $200 million of annual operating-cost reductions by the end of 2016 and is pursuing divestitures or exits from fixed-price power, certain U.S. infrastructure and mining, Building Group and fixed-price construction-only businesses.
- Three major EPC power projects remained loss-making. Two were expected to finish in summer 2015 and early 2016, with the third expected to finish in 2017.
- The reserve for estimated losses on uncompleted contracts was $118 million at March 31, 2015, including $37 million for Canadian projects and $65 million for two power projects. Actual results may differ from current estimates.
- KBR carried $401 million of long-term claims and accounts receivable related to the PEMEX/PEP EPC 1 arbitration and performance-bond recovery. Collection timing remains uncertain, although management believes recovery is probable.
- U.S. government contract matters include $188 million of outstanding Form 1 objections, $96 million withheld by the government, and $35 million accrued for probable losses from government audits. The LogCAP III closeout is expected to continue through at least 2018.
- Several lawsuits, False Claims Act matters, qui tam actions, government audits and contract disputes remain pending. Management generally assessed losses beyond recorded accruals as remote, but the securities litigation related to the 2013 restatement was too early to estimate.
- The company remains exposed to oil-price effects, project execution and estimation risk, customer concentration, foreign-currency movements, pension obligations, government-contract compliance, and potential restrictions on international cash.
- In April 2015, after quarter-end, KBR amended its revolving credit agreement to exclude foreign-currency translation effects from the consolidated-net-worth covenant. KBR reported compliance with its financial covenants as of March 31, 2015.
Most important facts for investors to verify
- Whether negative operating cash flow and the reduction in cash are temporary working-capital effects or indicate continuing liquidity pressure.
- Progress, final costs and cash requirements for the Canadian loss projects and the three loss-making power projects.
- Timing and collectability of the $401 million PEMEX/PEP arbitration receivable and other government claims.
- Backlog conversion, new LNG awards and the effect of major project completions on future revenue and margins.
- Compliance with revolving-credit covenants and the need to amend or replace the facility before its December 2016 maturity.
- Developments in U.S. government disputes, False Claims Act matters, securities litigation and other contingencies not fully quantifiable in the filing.
- Availability of international and joint-venture cash for corporate liquidity and the potential tax cost of repatriation.