KBR, Inc. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008. KBR, Inc. is a global engineering, construction, and services company operating in energy, petrochemicals, government services, and civil infrastructure sectors. The company operates through six business units: Government and Infrastructure (G&I), Upstream, Services, Downstream, Technology, and Ventures. The reporting period includes the impact of the July 1, 2008, acquisition of BE&K, Inc.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $3,018 million | $8,195 million |
| Operating Income | $144 million | $388 million |
| Net Income | $85 million | $231 million |
| Diluted EPS | $0.51 | $1.37 |
| Cash and Equivalents | $1,110 million | $1,110 million (Balance Sheet) |
| Operating Cash Flow | N/A | $1 million |
| Backlog | N/A | $15,250 million |
Note: Operating cash flow for the nine months ended September 30, 2008, was $1 million, a significant decrease from $172 million in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 39% ($841 million) for the quarter and 29% ($1,839 million) for the nine months compared to the prior year. This growth was driven primarily by the BE&K acquisition and increased activity in Middle East government operations and Upstream gas monetization projects.
- Profitability: Operating income rose 41% for the quarter and 83% for the nine months. Net income increased 35% for the quarter and remained flat year-over-year for the nine months ($231 million) due to a significant gain from discontinued operations in the prior year ($97 million) which was absent in the current year.
- Segment Performance: The Services segment revenue surged 600% for the quarter due to the BE&K acquisition. The Upstream segment revenue increased 35% for the quarter, driven by LNG and GTL projects.
- Cash Position: Cash and equivalents decreased from $1.86 billion at year-end 2007 to $1.11 billion at September 30, 2008. This decline was primarily due to the $552 million BE&K acquisition and $196 million in stock repurchases.
Guidance, Outlook, Risks, and Contingencies
- Acquisitions: KBR acquired BE&K, Inc. for approximately $552 million in cash. Pro forma revenue for the nine months ended September 30, 2008, would have been $9,544 million.
- Government Contract Risks: Significant exposure exists regarding U.S. government contracts (LogCAP III). Issues include unapproved claims totaling $74 million, potential withholding of costs related to security services (up to $400 million at risk), and ongoing DCAA audits regarding dining facilities and transportation costs.
- Legal Proceedings:
- FCPA Investigations: Ongoing SEC and DOJ investigations regarding the Bonny Island project in Nigeria and potential improper payments. Halliburton has agreed to indemnify KBR for fines and penalties, but reputational damage and debarment risks remain.
- PEMEX Arbitration: KBR received a favorable award of approximately $76 million plus interest for the EPC 28 project, recorded as a gain in Q1 2008. Collection is pending legal proceedings in Mexico.
- Subcontractor Litigation: A jury verdict against KBR in the ASCO litigation resulted in a $27 million judgment, which KBR intends to appeal and believes is billable to the U.S. government.
- Project Losses: The Skopje Embassy project has incurred total estimated losses of approximately $54 million. The Escravos GTL project was converted to a reimbursable contract in 2007, mitigating further fixed-price risk.
- Liquidity: The company maintains a $930 million Revolving Credit Facility, with $550 million currently utilized for letters of credit, leaving $380 million available. KBR is pursuing further expansion of credit capacity to support future project guarantees.
Key Facts for Investor Verification
- BE&K Integration: Verify the realization of synergies and the full-year revenue contribution from the BE&K acquisition.
- LogCAP Funding: Monitor the resolution of the $35 million in unbilled costs under LogCAP III due to funding allocation issues and the outcome of the security cost withholding dispute.
- FCPA Settlement Terms: Track the status of the Halliburton-led settlement discussions with the SEC and DOJ to ensure indemnification terms do not result in debarment or non-indemnified liabilities for KBR.
- Operating Cash Flow: Investigate the near-zero operating cash flow ($1 million) for the nine-month period, driven by working capital changes and project-specific cash usage (Escravos), to assess future liquidity needs.
- Skopje Embassy Losses: Confirm if the $54 million loss estimate remains accurate or if further cost overruns are anticipated as the project nears completion.