KBR, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012. The request metadata identifies “2011 Q2,” but the filing itself is a 2012 second-quarter Form 10-Q, filed July 25, 2012.
Business Context and Reporting Period
KBR is a global engineering, construction and services company serving energy, hydrocarbons, government services, infrastructure, minerals, civil infrastructure, power, industrial and commercial markets. Reportable segments are Hydrocarbons, Infrastructure, Government and Power, Services and Other.
The period reflects the completion of most Iraq LogCAP III operations in December 2011 and continued transition toward LogCAP IV and other government work. Hydrocarbons activity increased, particularly on LNG projects, while government-related revenue declined substantially.
Financial Performance and Position
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $2,062 million | $2,457 million | $4,063 million | $4,778 million |
| Operating income | $129 million | $169 million | $241 million | $313 million |
| Net income attributable to KBR | $104 million | $100 million | $195 million | $205 million |
| Diluted earnings per share | $0.70 | $0.65 | $1.31 | $1.34 |
| Operating margin | 6.3% | 6.9% | 5.9% | 6.6% |
Second-quarter revenue declined 16%, while operating income declined 24%. Net income attributable to KBR increased 4% because of lower taxes and lower noncontrolling interests. Six-month revenue declined 15%, operating income declined 23%, and attributable net income declined 5%. The filing does not present a separately defined adjusted EBITDA measure.
Cash used in operating activities was $55 million in the first six months of 2012, compared with $223 million of operating cash flow in the prior-year period. The 2012 use was driven principally by working-capital requirements on large projects, including a $292 million increase in unbilled receivables on uncompleted contracts and a $115 million reduction in advance billings.
Cash and equivalents were $824 million at June 30, 2012, compared with $966 million at December 31, 2011. Approximately $251 million was held by consolidated joint ventures and was restricted to project activities. Total assets were $5.695 billion and total shareholders’ equity was $2.621 billion.
Reported debt consisted primarily of $93 million of non-recourse project-finance debt held by a consolidated variable interest entity. KBR had no advances outstanding under its $1 billion revolving credit agreement, although $219 million of letters of credit had been issued under that facility. Total committed and uncommitted letter-of-credit capacity was approximately $2 billion, of which $682 million was utilized.
Cash used in investing activities was $31 million, principally capital expenditures. Cash used in financing activities was $49 million, including $25 million of share repurchases, $15 million of dividends and $10 million of debt principal payments. The quarterly dividend was $0.05 per share.
Material Changes Versus the Prior Comparable Period
- Hydrocarbons revenue increased 2% in the second quarter and 4% for the first six months; Hydrocarbons operating segment income increased 8% and 7%, respectively. Growth was led by Gorgon, Skikda and Ichthys LNG projects.
- Infrastructure, Government and Power revenue decreased 45% in the second quarter and 42% for the first six months, primarily because LogCAP III Iraq operations ended. Segment income decreased 61% and 50%, respectively.
- Services revenue decreased 4% in the second quarter and 8% for the first six months, reflecting completion or near-completion of major building and industrial-services projects, partly offset by growth in U.S. construction and Canadian operations.
- Corporate general and administrative expense decreased $6 million in the second quarter but increased $5 million for the first six months, with enterprise-resource-planning implementation costs contributing to the year-to-date increase.
- The company recorded a $28 million noncash, pretax reduction to revenue in the second quarter after a U.S. Court of Federal Claims ruling disallowed certain dining-facility costs under LogCAP III. KBR appealed.
- Backlog increased to $15.238 billion from $10.931 billion at December 31, 2011, primarily because of the approximately $5.6 billion Ichthys LNG award. Approximately 42% was expected to be executed within one year; 40% was fixed-price and 60% cost-reimbursable.
- The effective tax rate was 14% in the second quarter and 12% for the first six months, compared with 24% and 20% in the respective 2011 periods. The 2012 results included discrete tax benefits of approximately $19 million in the quarter and $39 million year to date.
Guidance, Outlook, Risks and Unusual Items
No specific quantitative earnings or revenue guidance is provided in the filing. Management expects U.S. and U.K. contingency-operations spending and Middle East government-services volumes to continue declining over the next several years, while identifying opportunities in hydrocarbons, LNG, infrastructure, Europe and other Middle Eastern markets.
Government-contract matters remain significant. At June 30, 2012, open DCAA Form 1 notices recommended suspension of approximately $349 million of prior-year contract costs, with approximately $144 million withheld from current billings. The government also demanded repayment of $96 million of disapproved costs, which KBR disputes. Government-contract unapproved claims included in receivables totaled $204 million.
Other material contingencies include the $205 million Petrobras bolt-arbitration liability, offset by a $205 million indemnification receivable from Halliburton; the ongoing PEMEX arbitration award and related approximately $80 million of performance bonds; private-security, dining-facility, containerized-housing and transportation disputes; First Kuwaiti arbitration claims; burn-pit and sodium-dichromate litigation; and disputes with Halliburton over tax-sharing and separation-agreement matters.
KBR had not accrued possible liquidated damages of approximately $8 million on several projects. The company also disclosed substantial customer concentration, including Chevron at 27% of consolidated revenue for the first six months of 2012 and Sonatrach at 11%. Updated risk factors highlight dependence on major customers and projects, government-contract compliance, information-technology disruption or cybersecurity, foreign exchange, project execution, claims collection and fixed-price contract exposure.
Management stated that internally generated cash and available credit facilities were sufficient for at least the next 12 months. The filing states that disclosure controls were effective as of June 30, 2012, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the $204 million of government unapproved claims and other unbilled receivables are ultimately collected without material write-downs.
- The resolution and cash impact of the $349 million of DCAA Form 1 recommendations, $144 million of withheld billings and $96 million of government demands.
- The outcome of the dining-facility appeal and related DOJ False Claims Act proceedings.
- The collectability and timing of the PEMEX award, including the status of Mexican performance bonds and U.S. enforcement proceedings.
- Whether the $205 million Halliburton indemnification receivable fully offsets the Petrobras liability in cash and timing.
- Execution, margin and cash-conversion trends on the large LNG backlog, particularly fixed-price work and the Ichthys, Gorgon and Skikda projects.
- The pace of decline in government-services revenue following LogCAP III completion and the ability of LogCAP IV, infrastructure and commercial awards to replace it.
- The sustainability of reported earnings given the $39 million year-to-date discrete tax benefit and other unusual litigation and contract items.