KBR, Inc. Form 10-Q Summary
Reporting period: The supplied filing is KBR’s quarterly report for the three and six months ended June 30, 2011, filed July 27, 2011. The request metadata identifies “2010 Q2,” but the filing itself reports 2011 results.
Business context
KBR is a global engineering, construction and services company serving the energy, petrochemicals, government services, industrial and civil infrastructure markets. Reportable segments are Hydrocarbons, Infrastructure, Government and Power, Services, and Other. Results are unaudited interim results and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2.457 billion | $2.671 billion | $4.778 billion | $5.302 billion |
| Operating income | $169 million | $199 million | $313 million | $298 million |
| Net income | $127 million | $122 million | $244 million | $181 million |
| Net income attributable to KBR | $100 million | $106 million | $205 million | $152 million |
| Diluted EPS | $0.65 | $0.66 | $1.34 | $0.94 |
| Operating margin | 6.9% | 7.5% | 6.6% | 5.6% |
| Net margin attributable to KBR | 4.1% | 4.0% | 4.3% | 2.9% |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $223 million | $432 million |
- Q2 revenue declined 8%, primarily because of lower North American government and defense activity, particularly the wind-down of LogCAP III in Iraq. Six-month revenue declined 10%.
- Q2 operating income declined 15%, while six-month operating income increased 5%. Six-month profitability benefited from improved Hydrocarbons results and lower tax expense.
- Hydrocarbons revenue increased 10% in Q2 and 11% for the first half, led by Gas Monetization, Gorgon LNG and Escravos GTL activity. IGP revenue declined 26% in Q2 and 29% year to date.
- Cash and equivalents were $712 million at June 30, 2011, compared with $786 million at December 31, 2010. Approximately $212 million was held by consolidated joint ventures and was restricted to project activities.
- Operating cash flow fell to $223 million from $432 million, reflecting working-capital movements, taxes and pension contributions. Investing cash use was $58 million, including $47 million of capital expenditures.
- Financing cash use was $248 million, including $164 million to acquire the remaining interest in MWKL, $37 million of share repurchases, $46 million of distributions to noncontrolling interests and $15 million of dividends.
- Total nonrecourse project-finance debt of a consolidated variable-interest entity was $102 million. KBR had no advances outstanding under its $1.1 billion revolving credit facility; $261 million of letters of credit were issued under the facility.
- KBR had approximately $1.8 billion of committed and uncommitted lines supporting letters of credit, with $586 million utilized at June 30, 2011. The company reported compliance with its revolving-credit covenants.
- Backlog was $11.974 billion, compared with $12.041 billion at December 31, 2010; approximately 58% was expected to be executed within one year.
Material changes versus the prior comparable period
- The principal adverse change was the continuing reduction in U.S. military support work under LogCAP III. Q2 North America Government and Defense revenue fell $328 million, and first-half revenue fell $733 million, year over year.
- No LogCAP III award fee was recognized in Q2 2011, compared with $60 million in Q2 2010. KBR recognized $16 million of LogCAP award fees in the first half of 2011, versus $60 million in the first half of 2010.
- Hydrocarbons partly offset the government-services decline. Q2 Hydrocarbons revenue rose $96 million and operating segment income rose $5 million.
- The December 2010 acquisition of Roberts & Schaefer increased Infrastructure and Minerals revenue and operating income.
- KBR completed the acquisition of the remaining 44.94% of MWKL for approximately $164 million, reducing noncontrolling interests but materially increasing financing cash outflows.
- The company sold its 50% interest in an Indonesian LNG joint venture for approximately $22 million and recognized an $8 million gain in equity earnings.
- The effective tax rate was approximately 24% in Q2 2011 versus 36% in Q2 2010, and approximately 20% for the first half versus 36% in the prior-year first half. The decline reflected foreign tax differentials and discrete tax benefits.
Guidance, outlook, risks and unusual items
- Management expected LogCAP III volumes in Iraq to continue declining through the second half of 2011 as U.S. troops exited Iraq. LogCAP IV activity partially offset the decline, but overall Iraq volume was expected to decrease.
- Management described Hydrocarbon markets as generally recovered from the recession and noted continuing long-term demand for LNG, oil and gas, refining, chemicals, fertilizers and related technologies. Infrastructure markets remained affected by economic conditions and project delays.
- KBR expected LogCAP III award fees in the third quarter of 2011 for the September 2010 through February 2011 performance period; the available pool remained subject to customer determination.
- Open DCAA Form 1 matters recommended suspension of approximately $360 million of prior contract costs, with approximately $162 million withheld from current billings. The company also had $83 million of government demand letters for disapproved costs that it disputed.
- Unapproved government-contract claims totaled $149 million and had been recognized as revenue because management considered them probable of collection.
- Significant litigation and contingencies included government-contract disputes, private-security and dining-facility matters, False Claims Act litigation, First Kuwaiti arbitration, burn-pit litigation, convoy-ambush litigation and other Iraq-related claims. Several matters had no accrual because outcomes or loss ranges could not be reliably estimated.
- The PEMEX arbitration award remained a long-term receivable; collection timing was uncertain, and any eventual recovery could produce an additional gain.
- Environmental remediation accruals were approximately $7 million, representing the low end of a possible cost range of up to $13 million. Potential unaccrued liquidated damages totaled approximately $19 million.
- The Barracuda-Caratinga bolts matter included a $12 million liability and a corresponding $12 million Halliburton indemnification receivable.
- Backlog was 76% cost-reimbursable and 24% fixed-price, exposing results to project execution, cost-estimate, customer-funding and contract-claim risks.
Most important facts for investors to verify
- Whether the LogCAP III decline and timing of the Iraq drawdown are offset by LogCAP IV, Afghanistan, NATO and commercial project awards.
- The timing, amount and collectability of LogCAP award fees and the $149 million of unapproved government-contract claims.
- Resolution and cash impact of DCAA Form 1 matters, government demand letters and related subcontractor withholdings.
- Collection timing and ultimate recovery of the PEMEX receivable and other significant claims and arbitration awards.
- Whether backlog conversion, especially the $6.071 billion Hydrocarbons backlog, supports future revenue and margins as major projects progress or complete.
- Availability of unrestricted liquidity, given that approximately $212 million of cash was held by consolidated joint ventures and $586 million of letter-of-credit capacity was utilized.
- Potential changes to tax liabilities associated with the Australian joint venture liquidation and settlements with former parent Halliburton.