KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed July 25, 2013. The request metadata identifies “2012 Q2,” but the supplied filing is the 2013 second-quarter Form 10-Q, with comparable 2012 results.
Business Context and Reporting Period
KBR is a global engineering, construction and services company serving hydrocarbons, infrastructure, government, power, minerals and industrial markets through Hydrocarbons, Infrastructure, Government and Power, Services and Other segments. Operations are project-driven, with significant exposure to large LNG and hydrocarbons projects, U.S. and foreign government contracts, joint ventures and percentage-of-completion accounting.
Management reported that U.S. and U.K. government activity in Iraq and the Middle East was declining as troop levels and related programs were reduced, while activity increased in Canadian construction and oil sands markets and on major LNG projects, including Ichthys and Gorgon.
Financial Performance and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1,996 million, versus $2,062 million | $3,855 million, versus $4,063 million |
| Operating income | $123 million, versus $129 million | $256 million, versus $241 million |
| Net income | $111 million, versus $112 million | $208 million, versus $210 million |
| Net income attributable to KBR | $90 million, versus $104 million | $178 million, versus $195 million |
| Diluted EPS | $0.61, versus $0.70 | $1.20, versus $1.31 |
| Cash dividends declared per share | $0.08, versus $0.05 | $0.08, versus $0.10 |
- Operating margin was approximately 6.2% in the quarter and 6.6% for the first six months, compared with approximately 6.3% and 5.9%, respectively, in the comparable 2012 periods.
- Revenue declines reflected lower Hydrocarbons and Infrastructure, Government and Power activity, partly offset by Services growth. Services revenue increased 46% in the quarter and 43% year to date.
- Segment operating income increased to $203 million in the quarter from $187 million and to $403 million for the six months from $353 million. Corporate general and administrative expense increased to $63 million in the quarter and $115 million year to date.
- Effective tax rates were approximately 12% for the quarter and 18% year to date. Adjusted rates excluding discrete items were approximately 19% and 23%, respectively. First-half 2013 discrete tax benefits were approximately $14 million.
- Cash flow from operations was negative $97 million for the first six months, compared with negative $55 million in 2012. The 2013 amount was materially affected by the $108 million payment on PEMEX-related performance bonds.
- Capital expenditures were $40 million, compared with $33 million. Financing cash outflows were $69 million, including $46 million of distributions to noncontrolling interests, $12 million of dividends and $6 million of share repurchases.
- Cash and equivalents totaled $800 million at June 30, 2013, down from $1.053 billion at December 31, 2012. Approximately $141 million was held by consolidated joint ventures and was restricted to project activities.
- Debt consisted primarily of non-recourse project-finance debt of consolidated variable interest entities: $84 million at June 30, 2013. KBR had no borrowings outstanding under its $1 billion revolving credit facility, although $235 million of letters of credit were issued under it.
- KBR had approximately $2.2 billion of committed and uncommitted letter-of-credit capacity, of which $726 million was utilized. Management stated that liquidity and letter-of-credit capacity were adequate for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Hydrocarbons revenue decreased 15% in the quarter and 15% year to date, primarily because Escravos GTL and Skikda LNG projects were completing or nearing completion. Hydrocarbons segment operating income nevertheless increased 8% in the quarter and 22% year to date.
- Infrastructure, Government and Power revenue decreased 20% in the quarter and 21% year to date, mainly because of reduced LogCAP IV activity, government drawdowns, project completions and weaker minerals and infrastructure markets. Segment operating income declined 11% in the quarter and 22% year to date.
- Services revenue increased $197 million in the quarter and $334 million year to date, driven largely by Canadian gas-plant and oil-sands work, the Building Group and industrial services. Services segment operating income increased 44% in the quarter and 46% year to date.
- Backlog declined to $13.804 billion from $14.931 billion at December 31, 2012. Hydrocarbons backlog was $8.746 billion, IGP backlog was $2.265 billion and Services backlog was $1.862 billion. Approximately 51% of backlog was expected to be executed within one year; 48% was fixed-price and 52% cost-reimbursable.
- Management recorded positive contract-estimate revisions of $13 million in the quarter and $51 million year to date, primarily in Hydrocarbons Gas Monetization projects.
- Accumulated other comprehensive loss increased to $645 million from $610 million, primarily due to foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide explicit consolidated earnings guidance in the supplied filing. It expected Ichthys and Gorgon LNG activity to contribute significantly, while Escravos GTL and Skikda LNG were nearing completion and expected to become less significant future revenue and profit drivers.
- Government-contract risks remain significant. DCAA Form 1s recommended suspension of approximately $283 million of prior-year contract costs, including $138 million withheld from current billings. Customer demand letters totaled $108 million for disallowed costs that KBR disputes.
- Government-contract claims included in receivables totaled $260 million, including $102 million in accounts receivable and $158 million in unbilled receivables. KBR considered these claims probable of collection, but recovery depends on negotiations, audits and litigation.
- Percentage-of-completion claims and unapproved items included $170 million of claims and $28 million of unapproved change orders. The company had recognized $134 million of additional revenue related to claims on an LNG EPC contract.
- Unaccrued potential liquidated damages were approximately $8 million, compared with $2 million at December 31, 2012.
- KBR paid $108 million in June 2013 on PEMEX-related performance bonds and recorded a long-term receivable because management believed recovery was probable. The timing and ultimate collection remained uncertain and depended on U.S., Luxembourg, Mexican and NAFTA proceedings.
- The Oregon sodium dichromate litigation resulted in an $81 million judgment, including $75 million of punitive damages. KBR appealed and stated that the likelihood of ultimately incurring a loss was remote; no amount was accrued at June 30, 2013.
- An African Development Bank investigation into corruption related to the Bonny Island project was opened in March 2013. KBR stated that the outcome, financial effect and potential debarment could not yet be determined.
- KBR faced a disputed $256 million tax-sharing demand from former parent Halliburton; $49 million was recorded as due to the former parent, and management considered the probability of an excess loss remote.
- The filing identifies customer concentration: Chevron represented 27% of consolidated revenue for the first six months of 2013. Government spending, project delays, fixed-price execution, contract claims, audits, foreign exchange, joint ventures and large-project performance remain key risks.
Most Important Facts for Investors to Verify
- Confirm that the intended filing period is June 30, 2013 rather than 2012 Q2.
- Assess the collectability and timing of the $260 million in government claims, $170 million in project claims and the PEMEX-related long-term receivable.
- Track DCAA audits, Form 1 withholdings, False Claims Act matters and other government-contract litigation.
- Evaluate backlog conversion, particularly the $13.8 billion backlog, its declining trend and the 48% fixed-price mix.
- Determine whether LNG project estimate revisions and the Ichthys and Gorgon ramps are sustainable after major projects complete.
- Monitor liquidity after the $253 million first-half decrease in cash, restricted joint-venture cash, letter-of-credit usage and performance-bond requirements.
- Verify the status and potential exposure from the PEMEX enforcement proceedings, sodium dichromate litigation and African Development Bank investigation.