KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. The request metadata identifies “2008 Q3,” but the supplied filing is KBR’s 2009 third-quarter Form 10-Q, filed October 29, 2009. KBR is a global engineering, construction and services company serving energy, petrochemical, government, industrial and infrastructure markets.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $2.840 billion, down 6% from $3.018 billion | $9.141 billion, up 12% from $8.195 billion |
| Operating income | $131 million, down 9% from $144 million | $412 million, up 6% from $388 million |
| Net income attributable to KBR | $73 million, versus $85 million | $217 million, versus $231 million |
| Diluted EPS attributable to KBR | $0.45, versus $0.51 | $1.35, versus $1.37 |
| Operating cash flow | Not separately provided for the quarter | $(27) million, versus $1 million provided |
| Cash and equivalents | $1.020 billion at September 30, 2009, versus $1.145 billion at December 31, 2008 | |
| Total debt | The filing does not provide a clear consolidated debt balance; there were no cash borrowings under the revolving facility |
Reported operating margin was approximately 4.6% for the quarter and 4.5% for the nine months. The effective tax rate was 25% for the quarter and 33% year to date, compared with approximately 36% in both 2008 periods. The company declared dividends of $0.05 per share in the quarter and $0.15 per share year to date.
At September 30, 2009, total assets were $5.578 billion, total liabilities were $3.303 billion and total shareholders’ equity was $2.275 billion. Receivables totaled $2.270 billion, including $867 million of unbilled receivables on uncompleted contracts.
Material changes versus the prior comparable period
- Third-quarter revenue declined primarily because Government and Infrastructure revenue fell 22%, including a 19% decline in U.S. Government Middle East operations as Iraq-related activity under LogCAP III decreased.
- Upstream revenue increased 34% in the quarter and 22% year to date, driven by Gas Monetization projects, although LNG project delays, equipment failures and subcontractor claims reduced profitability.
- Services revenue increased 122% year to date, primarily because the BE&K acquisition contributed approximately $809 million of revenue and approximately $70 million of job income.
- Year-to-date operating income increased despite lower attributable net income, reflecting higher segment income and lower corporate general and administrative expense. Net income attributable to KBR was affected by higher noncontrolling interests and the absence of 2008 discontinued-operation income.
- Third-quarter goodwill impairment was $6 million for a staffing business acquired with BE&K, reflecting recessionary weakness and reduced forecasts.
- Equity in earnings of unconsolidated affiliates included a $15 million first-quarter loss related to the In Amenas arbitration and $25 million of third-quarter losses from three LNG projects.
- Backlog was $13.484 billion at September 30, 2009, down from $14.097 billion at December 31, 2008. Upstream backlog increased to $7.563 billion, while Government and Infrastructure backlog declined to $2.550 billion.
Liquidity, commitments and outlook
- Operating cash flow was negative $27 million year to date, reflecting working-capital requirements, project funding and reductions in customer advances.
- The $930 million revolving credit facility had no cash draws and $489 million of outstanding letters of credit, leaving $441 million of stated availability. KBR was in compliance with its financial covenants.
- KBR had approximately $532 million of letters of credit and financial guarantees under its own facilities, plus $314 million under Halliburton facilities guaranteed by Halliburton.
- Management expected approximately $30 million of 2009 capital expenditures and stated that existing cash, operating cash flow and the revolving facility were the principal liquidity sources.
- Management expected LogCAP III work to decline as the U.S. government transitions activity to LogCAP IV, although certain task orders were expected to continue through the second half of 2010. LogCAP III backlog was $776 million at September 30, 2009, compared with $1.4 billion at December 31, 2008.
- Management cited improving international hydrocarbon markets and anticipated stronger 2010 opportunities in certain power and infrastructure markets, but noted smaller bids, increased competition and weaker North American capital spending.
- Approximately 52% of backlog was expected to be completed within one year; 18% was fixed-price and 82% cost-reimbursable.
Risks, contingencies and unusual items
- LogCAP III award fees are estimated at a 72% accrual rate. Approximately $118 million of estimated award fees was included in unbilled receivables, subject to future customer determinations.
- Government contract disputes included approximately $103 million of disapproved security costs, with approximately $42 million withheld; approximately $86 million of dining-facility costs under review; $122 million of unapproved government claims recognized as probable of collection; and approximately $26 million of costs disapproved under CONCAP III.
- KBR faces significant litigation and arbitration matters, including a First Kuwaiti claim of approximately $121 million, a TES claim seeking $36 million, Petrobras bolt-related claims initially stated at $220 million, burn-pit litigation and remaining government-contract disputes. Several matters had no accrual because the outcome or loss range could not be reasonably estimated.
- KBR LLC pleaded guilty in February 2009 to FCPA violations related to the Bonny Island project. The DOJ penalty was $402 million, of which KBR’s share was $20 million and Halliburton was responsible for $382 million under an indemnity. Halliburton also paid the $177 million SEC settlement obligation. Foreign investigations, including a U.K. Serious Fraud Office investigation, continued.
- Environmental remediation accruals totaled approximately $8 million, with possible costs of up to $14 million. Potential unaccrued liquidated damages were approximately $33 million.
- Halliburton indemnities cover specified FCPA-related liabilities and certain Barracuda-Caratinga bolt costs, but do not cover all foreign-government liabilities or all FCPA-related losses.
- Economic conditions could reduce customer capital spending, delay projects, impair goodwill, increase pension funding requirements or weaken customer and supplier performance.
Facts investors should verify
- Whether LogCAP III award-fee determinations differ materially from the 72% accrual rate and how quickly work transitions to LogCAP IV.
- Collection timing and ultimate recoverability of unbilled receivables, including $118 million of estimated LogCAP award fees and $122 million of unapproved government claims.
- Cash conversion, project working-capital requirements and the sustainability of positive earnings despite negative year-to-date operating cash flow.
- Potential cost overruns, claims and margin pressure on LNG and other large fixed-price or near-completion projects.
- Resolution and financial exposure from DCAA audits, government withholdings, Petrobras arbitration, First Kuwaiti arbitration, burn-pit litigation and other legal matters.
- Availability of standalone letters-of-credit capacity as Halliburton support expires or as new large projects are awarded.