KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. The request metadata identifies “2013 Q1,” but the filing is the 2014 first-quarter Form 10-Q, filed June 18, 2014.
Business Context and Reporting Period
KBR provides engineering, procurement, construction, construction management, technology licensing, operations and maintenance, and government support services to energy, industrial, infrastructure, and government customers. Reportable segments are Gas Monetization, Hydrocarbons, Infrastructure, Government and Power, Services, and Other.
Management stated that first-quarter results did not meet expectations, primarily because of underperformance in Services and Infrastructure, Government and Power. The company also reorganized certain reporting units and recast prior-period segment information.
Financial Performance and Liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1.633 billion | $1.829 billion | Down 11% |
| Gross profit | $39 million | $156 million | Down 75% |
| Operating income | $10 million | $133 million | Down 92% |
| Income before taxes | $1 million | $127 million | Down 99% |
| Net income attributable to KBR | $(43) million | $88 million | Declined $131 million |
| Diluted EPS | $(0.29) | $0.59 | Declined $0.88 |
| Operating cash flow | $(17) million | $(93) million | Improved $76 million |
Gross margin was approximately 2.4%, compared with approximately 8.5% in the prior-year quarter. Equity in earnings of unconsolidated affiliates was $31 million, broadly comparable with $30 million in Q1 2013. General and administrative expense increased to $60 million from $52 million, primarily due to $6 million of additional ERP project costs. Foreign currency losses increased to $7 million from $4 million.
Cash and equivalents totaled $996 million at March 31, 2014, versus $1.106 billion at December 31, 2013. Cash used in investing activities was $15 million, principally for property, plant and equipment. Cash used in financing activities was $84 million, including $56 million for share repurchases, $12 million for dividends, and $19 million of distributions to noncontrolling interests.
KBR had no cash borrowings under its $1 billion revolving credit agreement and had $226 million of letters of credit outstanding under that facility. The company reported compliance with its financial covenants at March 31, 2014. Total debt balances are not clearly presented in the provided filing text; certain nonrecourse project-finance obligations relate to Fasttrax Limited.
Material Changes Versus the Prior Comparable Period
- Gas Monetization revenue fell 33% to $400 million as major Nigerian and Algerian projects completed or neared completion and Australian LNG activity declined. Gross profit nevertheless increased 7% to $95 million, including a $33 million favorable Algerian claims settlement.
- Hydrocarbons revenue increased 32% to $452 million, but gross profit fell 55% to $22 million because of a shift toward lower-margin EPC work, higher proposal and overhead spending, and additional project closeout and completion costs.
- Infrastructure, Government and Power revenue declined 16% to $337 million and gross profit moved to a $20 million loss from $19 million of profit. The decline reflected the wind-down of the Iraq U.S. military and State Department contract, weak Asia-Pacific markets, and $14 million of legal fees, settlements, and reserves related to legacy projects.
- Services revenue declined 9% to $433 million and gross profit fell to a $60 million loss from $11 million of profit. Canadian pipe fabrication and module assembly projects generated $41 million of additional estimated losses; U.S. construction projects also incurred $8 million of costs related to schedule delays and liquidated damages.
- Management recorded a $22 million increase in tax valuation allowances during the quarter. The quarterly effective tax rate was not meaningful because of low pretax income, Canadian losses, and discrete items.
- The board authorized a new $350 million share-repurchase program. KBR repurchased $56 million of stock during the quarter, with $307 million remaining under the authorization at March 31.
Guidance, Outlook, Risks, and Unusual Items
Management described long-term opportunities in LNG, gas processing, petrochemicals, infrastructure, power, and government services, but stated that new LNG EPC awards were not expected until 2015 or later. Backlog was $13.013 billion at March 31, 2014, down from $14.118 billion at December 31, 2013; 42% was expected to be executed within one year, 42% was fixed-price, and 58% was cost-reimbursable.
The Canadian pipe fabrication and module assembly projects remained in loss positions. The reserve for estimated losses on uncompleted contracts was $123 million, including $107 million related to those Canadian projects, and management expected completion in 2015. The company received no new orders under a Canadian master services-type agreement after the quarter ended.
KBR 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 pipe fabrication and module assembly business. These weaknesses contributed to the restatement of 2013 financial statements. Management stated that remediation plans were underway but provided no assurance that the weaknesses would be fully remediated.
Significant contingencies include U.S. government contract disputes and audits, False Claims Act and qui tam matters, burn-pit and other litigation, the $401 million EPC 1 receivable associated with the PEMEX/PEP arbitration award, and a $106 million payable to former parent Halliburton under the tax-sharing agreement. The timing and collectability of the PEMEX/PEP award remain uncertain. KBR also disclosed $10 million of potential liquidated damages that had not been accrued.
The company disclosed that its 2013 financial statements had been restated and that it received an SEC informal inquiry concerning the matters leading to the restatement. KBR obtained a waiver under its credit agreement for potential defaults related to the restatement.
Most Important Facts for Investors to Verify
- Whether the Canadian project-loss estimates and reserves are sufficient, and whether additional losses will arise before expected 2015 completion.
- The remediation and eventual resolution of the disclosed material weaknesses and the reliability of percentage-of-completion project estimates.
- The collectability, timing, and legal outcome of the $401 million PEMEX/PEP arbitration receivable and related enforcement proceedings.
- The ultimate exposure from U.S. government audits, Form 1 disputes, False Claims Act matters, qui tam claims, and other litigation.
- The status of the $106 million Halliburton payable and any remaining tax-sharing or separation-agreement disputes.
- Cash conversion, restricted or joint-venture cash, pension funding requirements, letters of credit, and the sustainability of dividends and share repurchases.
- Backlog quality, including the proportion of fixed-price work and the decline in backlog from year-end 2013.