KBR, Inc. Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. KBR, Inc. is a global engineering, construction, and services company operating through six business units: Government and Infrastructure (G&I), Upstream, Services, Downstream, Technology, and Ventures. The company supports energy, petrochemical, government services, and infrastructure sectors. As of April 24, 2009, 160,467,034 shares of common stock were outstanding.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $3,200 | $2,519 |
| Operating Income | $144 | $154 |
| Net Income Attributable to KBR | $77 | $98 |
| Diluted EPS | $0.48 | $0.58 |
| Cash and Equivalents (End of Period) | $921 | $1,927 |
| Operating Cash Flow | ($172) Used | $68 Provided |
| Total Assets | $5,655 | $5,884 |
| Total Liabilities | $3,556 | $3,850 |
Margins: Operating margin was approximately 4.5% in Q1 2009 compared to 6.1% in Q1 2008. The effective tax rate was 37% for Q1 2009 versus 36% for Q1 2008.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 27% year-over-year, driven primarily by the Services segment (up 427% due to the BE&K acquisition) and Upstream Gas Monetization (up 47%).
- Profitability Decline: Despite revenue growth, Net Income attributable to KBR decreased 21% to $77 million. Operating income fell 6% to $144 million.
- Cash Flow Reversal: Operating cash flow swung from a $68 million inflow in Q1 2008 to a $172 million outflow in Q1 2009. This was caused by increased working capital requirements for Iraq-related work ($110 million increase) and funding of joint venture projects ($143 million).
- Segment Performance:
- G&I: Revenue up 3%; Operating income flat at $81 million. Middle East operations revenue increased due to LogCAP III volume, but job income decreased due to a lower award fee accrual rate (72% vs 80%).
- Upstream: Revenue up 23%; Operating income down 30% to $73 million. Decreases were driven by the absence of a $51 million arbitration gain from PEMEX (recognized in 2008) and a $15 million loss on the In Amenas project arbitration ruling.
- Services: Revenue up 427% and Operating income up 85% to $24 million, largely due to the BE&K acquisition.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance: Management expects overall volume of work under the LogCAP III contract to decline in the long term as the U.S. government transitions to LogCAP IV, though the decline may be slower than previously expected due to troop levels. The company anticipates increased opportunities in civil infrastructure due to U.S. stimulus packages but notes uncertainty regarding funding availability due to the global economic crisis.
Unusual Items and Contingencies:
- FCPA Settlement: In February 2009, KBR LLC pleaded guilty to FCPA violations regarding the Bonny Island project. A criminal penalty of $402 million was agreed upon; Halliburton indemnifies $382 million, leaving KBR with a $20 million liability. A civil judgment of $177 million was also settled, fully indemnified by Halliburton. KBR paid $3 million of its share in Q1 2009.
- Legal Proceedings: Significant ongoing matters include the Skopje Embassy project (substantial completion reached, limiting further loss exposure), the In Amenas arbitration (resulted in a $15 million loss in Q1 2009), and various U.S. government contract disputes (LogCAP III security costs, containerized housing, dining facilities).
- Liquidity: The company has a $930 million Revolving Credit Facility with $403 million available after letters of credit. One bank in the syndicate recently filed for bankruptcy, though KBR does not believe access to the facility is materially at risk.
- Share Repurchases: The company repurchased 1.2 million shares for $16 million in Q1 2009 under a program authorized in December 2008.
Investor Verification Checklist
- LogCAP III Transition: Verify the timeline and revenue impact of the transition from LogCAP III to LogCAP IV and the stability of the 72% award fee accrual rate.
- FCPA Indemnity: Confirm the enforceability and sufficiency of Halliburton's indemnity regarding the $382 million criminal penalty and $177 million civil judgment.
- Working Capital Trends: Monitor the sustainability of the $172 million operating cash outflow and the $186 million working capital requirement for Iraq operations.
- Legal Exposure: Track the resolution of the PEMEX EPC 1 arbitration (decision expected H2 2009) and the First Kuwaiti Trading Company arbitration ($121 million claim).
- Project Delays: Assess the risk of liquidated damages on delayed projects, specifically the $58 million unaccrued exposure noted in the filing.