KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing text identifies this as 2014 Q3, although the request metadata states 2013 Q3. Comparisons are to the restated periods ended September 30, 2013. KBR is a global engineering, procurement, construction and services company serving energy, infrastructure, government, power, industrial and related markets.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $1.657 billion | $1.755 billion | $4.949 billion | $5.534 billion |
| Gross profit | $30 million | $114 million | $97 million | $410 million |
| Gross margin | 1.8% | 6.5% | 2.0% | 7.4% |
| Operating income | $10 million | $79 million | $45 million | $335 million |
| Net income attributable to KBR | $30 million | $(47) million | $(21) million | $131 million |
| EPS, diluted | $0.21 | $(0.32) | $(0.14) | $0.88 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $178 million | $81 million |
Q3 revenue declined 6% and nine-month revenue declined 11%. Gross profit fell 74% in Q3 and 76% for the first nine months. Operating margin was approximately 0.6% in Q3 and 0.9% for the nine months, compared with 4.5% and 6.1%, respectively, in the prior-year periods. The nine-month net loss attributable to KBR reflects significant project charges and lower operating performance.
- Cash and cash equivalents were $1.048 billion at September 30, 2014, compared with $1.106 billion at December 31, 2013; approximately $80 million was held by joint ventures and was not readily available for general corporate purposes.
- Total liabilities were $3.069 billion and shareholders’ equity was $2.317 billion at September 30, 2014.
- Reported nonrecourse project debt was $80 million, consisting of $10 million current and $70 million noncurrent. No cash borrowings were outstanding under the $1 billion revolving credit facility; $184 million of letters of credit were outstanding under that facility.
- Cash used in financing activities was $178 million, including $102 million of share repurchases, $35 million of dividends and $39 million of distributions to noncontrolling interests.
- Management stated that existing cash and internally generated cash flows should meet liquidity needs for the next 12 months. The company was in compliance with its credit agreement covenants at September 30, 2014.
Material changes versus the prior comparable period
- Segment mix and profitability: Gas Monetization revenue declined 36% for both Q3 and nine months as major projects neared completion; Hydrocarbons revenue increased 54% in Q3 and 47% for nine months, but profit declined due to lower-margin project mix and an $18 million North American EPC charge.
- Infrastructure, Government and Power: Q3 gross profit was a $40 million loss versus $17 million of profit in the prior-year quarter; the nine-month gross loss was $80 million versus $44 million of profit. Results included $33 million of Q3 and $47 million of nine-month charges for increased estimated costs on a North American power project, plus commercial dispute and legal reserves.
- Services: Q3 gross profit improved to $2 million from a $73 million loss because prior-year Canadian project losses did not recur at the same level. However, nine-month gross loss widened to $98 million from $42 million, including $80 million of losses on Canadian pipe fabrication and module assembly projects.
- Project estimates: KBR recorded $80 million of revisions to estimated losses on Canadian projects during the first nine months of 2014. The total reserve for estimated losses on uncompleted contracts increased to $118 million from $109 million at year-end, including $87 million related to Canada.
- Backlog: Backlog declined to $12.144 billion at September 30, 2014 from $14.118 billion at December 31, 2013. Approximately 57% was expected to be executed within one year; 38% was fixed-price and 62% cost-reimbursable.
- Cash flow: Operating cash flow increased to $178 million from $81 million, primarily because of $212 million of distributions from unconsolidated affiliates. Cash declined overall because of share repurchases, dividends, noncontrolling-interest distributions and foreign-exchange effects.
Guidance, outlook, commentary and unusual items
- New CEO Stuart Bradie initiated a global strategic review, targeted for substantial completion in the fourth quarter of 2014. Potential outcomes include restructuring, segment reorganization, goodwill impairment and restructuring charges; no specific financial guidance was provided.
- Management described Q3 results as improved from Q2 and Q3 2013 but still below acceptable levels. Gas Monetization performed well on major LNG projects, Hydrocarbons had strong new-order bookings, while IGP continued to underperform.
- Management expects long-term energy-project demand but noted that declining oil prices could adversely affect customer capital expenditures, project timing and demand for KBR services.
- KBR and Halliburton settled former-parent tax disputes for $81 million. KBR recognized a $24 million gain in Q3; payments are scheduled over four quarters, with a final $19 million payment tied to receipt of a future foreign tax credit or refund.
- The 2013 comparative financial statements were restated primarily for $89 million of additional estimated costs on Canadian contracts. The restatement reduced 2013 revenue by $25 million, increased cost of revenues by $62 million and produced a $15 million tax benefit.
- Management disclosed material weaknesses in internal control over financial reporting involving foreign-currency effects in long-term project estimates and the control environment for the Canadian business. Disclosure controls and procedures were therefore not effective as of September 30, 2014, although management concluded the financial statements were fairly presented after additional procedures.
- Material contingencies include U.S. government contract disputes, False Claims Act and qui tam matters, litigation related to Iraq operations, the $401 million long-term receivable from the PEMEX/PEP EPC 1 arbitration, and claims under U.S. government contracts. Timing and ultimate recovery of several claims remain uncertain.
Most important facts for investors to verify
- Progress and final cash cost of the Canadian pipe fabrication and module assembly projects, including whether the $118 million loss reserve is adequate and whether completion occurs in 2015 as anticipated.
- Recovery timing and collectibility of the $401 million PEP arbitration receivable and other government claims and receivables.
- Results of the strategic review, including potential segment changes, restructuring charges or goodwill and intangible-asset impairments.
- Remediation and auditor assessment of the two disclosed material weaknesses in internal controls.
- Sustainability of operating cash flow, given the significant contribution from joint-venture distributions and the limited availability of certain international and joint-venture cash.
- Exposure to oil and gas capital-spending trends, customer concentration, fixed-price contract losses, commercial disputes and U.S. government contract closeout matters.