KBR, INC. quarterly report, Q3 FY2013

KBR, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2013. The filing period differs from the request metadata, which identifies 2012 Q3. KBR is a global engineering, construction and services company serving energy, hydrocarbons, government, infrastructure, power, minerals and industrial markets. In the third quarter, KBR reorganized reporting into Gas Monetization, Hydrocarbons, Infrastructure, Government and Power (IGP), Services and Other.

Financial performance and position

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Total revenue	$1.811 billion	$1.992 billion	$5.666 billion	$6.055 billion
Operating income	$166 million	$(11) million	$422 million	$230 million
Net income attributable to KBR	$24 million	$(81) million	$202 million	$114 million
Diluted EPS	$0.16	$(0.55)	$1.36	$0.76
Cash flow from operations	Not separately provided	Not separately provided	$81 million	$(11) million

Q3 operating margin was approximately 9.2%, compared with negative 0.6% in the prior-year quarter. Nine-month operating margin was approximately 7.4%, compared with 3.8%.
Q3 net margin attributable to KBR was approximately 1.3%, compared with negative 4.1%. Nine-month net margin was approximately 3.6%, compared with 1.9%.
Cash and equivalents were $959 million at September 30, 2013, down from $1.053 billion at December 31, 2012. Approximately $102 million was held by consolidated joint ventures and was restricted to joint-venture activities.
Total assets were $5.420 billion and total shareholders’ equity was $2.737 billion at September 30, 2013.
Reported debt consisted primarily of non-recourse project-finance debt of a variable-interest entity: $9 million current and $80 million noncurrent. No advances were outstanding under the $1 billion revolving credit agreement.
KBR had approximately $2.2 billion of committed and uncommitted letter-of-credit capacity, with $708 million utilized. Outstanding letters of credit included $233 million under the revolving credit agreement and $475 million under uncommitted bank lines.
Cash used in investing activities was $50 million, principally for capital expenditures. Financing activities used $83 million, including $49 million of distributions to noncontrolling interests, $24 million of dividends and $7 million of share repurchases.
Cash dividends declared were $0.08 per share in Q3 and $0.16 per share for the first nine months, compared with $0.05 and $0.15, respectively, in the comparable 2012 periods.

Material changes versus the prior comparable period

Revenue declined 9% in Q3 and 6% for the first nine months, primarily because Gas Monetization and IGP activity declined as projects neared completion and Middle East government work decreased.
Operating income improved substantially because the prior-year periods included a $178 million noncash goodwill impairment charge related to the Minerals reporting unit. The 2013 periods included no comparable impairment charge.
Gas Monetization revenue fell 32% in Q3 and 27% year to date, but segment operating income rose to $153 million from $141 million in Q3 and to $349 million from $300 million for the first nine months. Results benefited from a $71 million Gorgon LNG change order and progress on Ichthys LNG.
Hydrocarbons revenue increased 17% in Q3 and 12% year to date, supported by ammonia projects and increased activity in North America and Azerbaijan. Segment operating income decreased 20% in Q3 but increased 5% year to date.
IGP revenue decreased 12% in Q3 and 18% year to date due to lower LogCAP IV activity, troop withdrawals, project completions and weaker infrastructure and minerals markets. Segment operating income was $26 million versus a $149 million loss in Q3 2012, which included the goodwill impairment.
Services revenue increased 18% in Q3 and 34% year to date, driven by Canadian construction, fabrication and turnaround services, U.S. building and construction projects, and maintenance services. Segment operating income increased to $17 million from zero in Q3 and to $58 million from $28 million year to date.
Corporate general and administrative expense increased to $66 million in Q3 and $181 million year to date, versus $56 million and $163 million, respectively, mainly due to ERP and information-technology costs.
Significant contract-estimate revisions increased Gas Monetization segment operating income by $90 million in Q3 and $141 million year to date. These amounts included the $71 million Gorgon change order.
Backlog decreased to $14.168 billion from $14.931 billion at December 31, 2012. Gas Monetization and IGP backlog declined, while Hydrocarbons and Services backlog increased. Approximately 50% of backlog was expected to be executed within one year; 46% was fixed-price and 54% cost-reimbursable.

Outlook, risks, contingencies and unusual items

Management expected Ichthys and Gorgon LNG, Dyno Nobel and other ammonia projects, LogCAP IV, Aspire Defence and Canadian and Middle Eastern Services projects to remain important contributors. Escravos GTL, Skikda LNG and several oil-and-gas projects were nearing completion.
Management expected U.S. and U.K. government work in the Middle East to continue declining as troop levels and related activity decrease. Sequestration, delayed infrastructure spending and weak minerals markets were identified as risks.
Claims and unapproved change orders included $167 million of claims and $23 million of unapproved change orders. Government-contract claims included in receivables totaled $239 million and had been recognized as revenue based on management’s assessment of probable collection.
DCAA Form 1s recommended suspension of approximately $284 million of historical contract costs, of which $138 million had been withheld. The government also issued demand letters seeking $109 million of disallowed costs; KBR disputed its obligation to pay.
KBR had not accrued $7 million of potential liquidated damages related to several projects because management assessed the likelihood of incurrence as not requiring accrual.
The Halliburton tax-sharing dispute resulted in an accounting referee report stating that KBR owed approximately $105 million. KBR increased its tax provision by $38 million, reduced paid-in capital by $7 million and recorded a $29 million deferred tax asset.
KBR paid $108 million on PEMEX-related performance bonds during the first nine months and recorded a long-term receivable for amounts it believed were recoverable. A September 2013 U.S. judgment totaled $465 million, including performance bonds and interest, but PEMEX appealed.
An African Development Bank investigation related to the Bonny Island project remained unresolved. The filing states that the financial implications and potential debarment consequences could not yet be determined.
Significant litigation included private-security, containerized-housing, dining-facility, transportation, False Claims Act, electrocution, burn-pit and sodium-dichromate matters. KBR generally assessed probable losses as remote or recorded applicable accruals, but the filing describes an $81 million Oregon sodium-dichromate judgment under appeal.
Management stated that internally generated cash was sufficient for at least the next 12 months and that KBR was in compliance with its revolving-credit financial covenants at September 30, 2013.
Disclosure controls were considered effective. KBR was implementing a company-wide ERP system, and the first Canadian phase materially changed certain internal controls over financial reporting.

Key facts for investors to verify

Reconcile the requested 2012 Q3 period with the filing’s actual September 30, 2013 reporting period.
Assess the sustainability of earnings given that major Q3 and year-to-date profit improvements included the $71 million Gorgon change order and the absence of the $178 million prior-year impairment.
Monitor collection and resolution of the $239 million in government claims, DCAA Form 1 matters, disputed costs and other unbilled receivables.
Track PEMEX enforcement proceedings, performance-bond recovery and the timing of any cash collection.
Evaluate exposure from the Halliburton $105 million tax-sharing award and the unresolved African Development Bank investigation.
Review backlog quality, including the 46% fixed-price mix, project completion timing and declining Gas Monetization and IGP backlog.
Confirm liquidity available after restricted joint-venture cash, letters of credit, pension contributions, dividends, project working-capital needs and potential legal or tax payments.