KBR, Inc. Form 10-Q Summary
Period: Quarterly and nine-month periods ended September 30, 2010. The request identifies “2009 Q3,” but the supplied filing is KBR’s third-quarter 2010 Form 10-Q, filed October 28, 2010.
Business Context and Reporting Period
KBR is a global engineering, construction and services company serving energy, petrochemical, government, industrial and infrastructure markets through Hydrocarbons, Infrastructure, Government and Power, Services and Ventures operations. The company reorganized its business during the first quarter of 2010 into market-focused engineering and construction units.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2010 | Three months ended Sept. 30, 2009 | Nine months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2009 |
|---|---|---|---|---|
| Total revenue | $2.455 billion | $2.840 billion | $7.757 billion | $9.141 billion |
| Operating income | $163 million | $131 million | $461 million | $412 million |
| Net income attributable to KBR | $97 million | $73 million | $249 million | $217 million |
| Diluted EPS | $0.62 | $0.45 | $1.56 | $1.35 |
| Operating margin | 6.6% | 4.6% | 5.9% | 4.5% |
| Net margin attributable to KBR | 4.0% | 2.6% | 3.2% | 2.4% |
- Revenue mix: Third-quarter Hydrocarbons revenue increased 10% to $974 million, while Infrastructure, Government and Power revenue declined 34% to $983 million. Services revenue increased 3% to $480 million.
- Profitability: Third-quarter operating income increased 24%, and operating margin expanded approximately 200 basis points. Hydrocarbons operating segment income increased 43% to $93 million; IGP income declined 20% to $83 million.
- Cash flow: Nine-month operating cash flow was $541 million versus cash used of $27 million in the prior-year period. Investing cash outflow was $83 million and financing cash outflow was $258 million.
- Liquidity: Cash and equivalents were $1.175 billion at September 30, 2010, up from $941 million at December 31, 2009. Approximately $253 million was held by consolidated joint ventures and was restricted to project use. Restricted cash totaled $21 million.
- Debt and credit: KBR had no borrowings under its $1.1 billion revolving credit facility, but had $308 million of letters of credit outstanding under it. Consolidated non-recourse Fasttrax project-finance debt totaled $107 million. KBR reported compliance with its credit-facility covenants.
- Capital allocation: KBR repurchased approximately 9.5 million shares for $217 million during the first nine months and paid $24 million in shareholder dividends. The quarterly dividend was $0.05 per share.
- Backlog: Continuing-operations backlog was $12.328 billion at September 30, 2010, down from $14.098 billion at year-end 2009. Approximately 53% was expected to be completed within one year; 79% was cost-reimbursable and 21% fixed-price.
Material Changes Versus the Prior Comparable Period
- Revenue declined 14% in the third quarter and 15% for the first nine months, primarily because of lower U.S. military support activity under LogCAP III and lower activity in certain infrastructure projects.
- North America Government and Defense revenue fell $440 million in the quarter and $1.461 billion year to date, partly offset by LogCAP IV activity and increased international government work.
- Hydrocarbons revenue and income increased due to higher activity on Gorgon LNG, Escravos GTL, Sonangol and Middle East projects. Third-quarter results also benefited from a $42 million non-cash commercial-agent settlement gain, substantially offsetting a $42 million non-cash LNG project cost-growth charge.
- Operating cash flow improved by $568 million year to date, driven by earnings, improved project cash receipts, lower LogCAP working-capital requirements and approximately $94 million of award-fee receipts.
- Effective January 1, 2010, KBR began consolidating Fasttrax Limited as a variable interest entity. This increased reported assets, liabilities, cash and non-recourse debt without creating a direct KBR debt obligation.
- Year-to-date results included approximately $60 million of LogCAP award fees recorded in the second quarter and approximately $34 million recorded in the third quarter.
Outlook, Risks, Contingencies and Unusual Items
- Management expects LogCAP III activity and overall Iraq work to continue declining through the remainder of 2010, although certain task orders are expected to continue through 2011. Work is transitioning to the competitive LogCAP IV contract.
- Management cited improving but phased Hydrocarbons markets, continued long-term demand for energy projects and technology, and slower Gulf of Mexico offshore activity following the federal drilling moratorium.
- An LNG project was approximately 71% complete at September 30, 2010. Schedule delays and customer-related actions increased estimated completion costs and generated a $42 million non-cash charge. KBR is pursuing contractual remedies and possible recovery.
- Open DCAA Form 1 notices recommended suspension of approximately $340 million of prior-year contract costs, of which approximately $164 million had been withheld from current billings. The company also had $96 million of customer demand letters for disallowed costs that it did not intend to pay.
- Unapproved government-contract claims recognized as revenue totaled $160 million at September 30, 2010. Recovery is considered probable by management, but collection timing and ultimate resolution remain uncertain.
- Significant legal matters include the DOJ False Claims Act complaint regarding private security costs, government contract audits, subcontractor arbitrations, burn-pit and convoy litigation, and other Iraq-related claims. Several matters have no accrued loss because outcomes or potential losses cannot be estimated or are considered remote.
- Environmental remediation accruals were approximately $7 million, with possible costs estimated at up to $14 million. Unaccrued potential liquidated damages totaled $28 million.
- Halliburton indemnified KBR for specified FCPA-related penalties and certain Barracuda-Caratinga bolt liabilities. Halliburton paid $559 million of FCPA-related amounts through September 30, 2010; KBR made its final $20 million DOJ-related payment on October 1, 2010.
- Management stated that disclosure controls were effective as of September 30, 2010 and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the filing period: the supplied document reports third-quarter 2010 results, not third-quarter 2009.
- Assess the sustainability of improved margins and cash flow after excluding the commercial-agent settlement gain, award fees and other project-specific items.
- Monitor the pace of LogCAP III decline, LogCAP IV awards and the resulting effect on IGP revenue, margins and backlog.
- Evaluate collectability and timing of the $160 million in recognized unapproved government claims and the $340 million of DCAA-recommended suspended costs.
- Track the LNG project cost forecast, contractual recovery efforts and potential additional charges.
- Review the $12.328 billion backlog for cancellation, funding, execution, fixed-price and customer-concentration risks.
- Confirm the availability of cash because $253 million was held by consolidated joint ventures and was not generally available for corporate needs.
- Follow outstanding litigation, False Claims Act proceedings, foreign corruption investigations and the scope and enforceability of Halliburton indemnities.