KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; comparative periods ended June 30, 2014. The request metadata identifies “2014 Q2,” but the filing itself is the 2015 second-quarter Form 10-Q.
Business Context
KBR provides engineering, procurement, construction, technology, consulting, operations, maintenance and government services to global hydrocarbons, infrastructure and government customers. Following its December 2014 strategic review, KBR reported Technology & Consulting, Engineering & Construction, Government Services, Non-strategic Business and Other segments. Non-strategic Business contains activities intended for sale or exit.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $1,381 million | $1,659 million | $2,817 million | $3,292 million |
| Gross profit | $74 million | $28 million | $144 million | $67 million |
| Operating income | $96 million | $25 million | $160 million | $35 million |
| Net income attributable to KBR | $62 million | $(8) million | $106 million | $(51) million |
| Diluted EPS | $0.43 | $(0.06) | $0.73 | $(0.35) |
- Gross margin was approximately 5.4% in the quarter and 5.1% for the six months, compared with approximately 1.7% and 2.0%, respectively, in the prior-year periods.
- Cash used in operating activities was $139 million for the first six months, versus $20 million of cash provided in the prior-year period. Working-capital movements, $39 million of net foreign-exchange derivative settlements and $21 million of pension contributions were significant uses.
- Cash and equivalents declined to $731 million at June 30, 2015, from $970 million at December 31, 2014. Cash included $61 million held by consolidated joint ventures and therefore not readily available for general corporate purposes.
- Investing activities provided $19 million, principally from asset-sale proceeds. Financing activities used $98 million, including $40 million for an acquisition of a noncontrolling interest, $17 million for share repurchases, $23 million for dividends and $12 million of distributions to noncontrolling interests.
- The $1 billion revolving credit facility had no cash borrowings and $160 million of letters of credit outstanding. KBR reported compliance with its financial covenants, although management expected a reduced cushion under the debt-to-EBITDA covenant in the third quarter.
- Reported nonrecourse project debt was $69 million at June 30, 2015, consisting of $10 million current and $59 million noncurrent debt.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 17% in the quarter and 14% year to date, primarily because of reduced activity on an Australian LNG project, completion or near completion of projects in the United States and Canada, and lower Afghanistan-related government-services activity.
- Profitability improved substantially. E&C gross profit increased to $52 million in the quarter and $107 million year to date, primarily reflecting negotiated settlements and the absence of prior-year losses on Canadian pipe fabrication and module assembly projects.
- Non-strategic Business improved from a $19 million quarterly gross loss and $29 million year-to-date gross loss to $2 million of gross profit in both 2015 periods, due to the non-recurrence of prior project charges and lower overhead.
- General and administrative expense declined 30% in the quarter and 33% year to date following headcount reductions, cost savings and cancellation of the ERP implementation project.
- Government Services generated a $5 million gross loss year to date versus $4 million of gross profit in the prior-year period, partly because of $10 million of legal fees related to legacy U.S. government contracts.
- KBR recognized a $28 million pretax gain on the June 30 sale of its Building Group subsidiary for approximately $23 million of net cash proceeds.
- KBR corrected a cumulative error involving transactions between unconsolidated Mexican offshore maintenance affiliates. The correction increased 2015 equity-method earnings by $15 million in both the quarter and six-month period; management concluded prior financial statements were not materially misstated.
Guidance, Outlook, Risks and Unusual Items
- Management cited near-term adverse effects from low oil prices but continued to expect longer-term opportunities in LNG, low-cost production, brownfield projects, petrochemicals, chemicals and fertilizer. KBR emphasized its mix of hydrocarbons and recurring government-services work.
- Backlog was $15.3 billion at June 30, 2015, including a $5.4 billion increase from a revised policy that includes the estimated value of U.K. government PFI work beyond five years. Approximately 36% of backlog was expected to be executed within one year; 61% was fixed-price.
- Two Canadian pipe fabrication and module assembly projects were expected to be completed or substantially closed out by the end of 2015. KBR subsequently announced proposed partnerships and asset transactions with Bernhard Capital Partners expected to generate approximately $32 million of net cash proceeds before year-end 2015.
- Loss reserves on uncompleted contracts totaled $73 million at June 30, including $52 million related to two power projects. These projects were expected to require future cash expenditures in excess of customer receipts and to be completed in 2017.
- KBR expects to renew or amend its revolving credit agreement no later than December 2015 because the existing facility expires in December 2016 and project letters of credit may extend beyond that date.
- Material contingencies include U.S. government contract audits and disputes, LogCAP III closeout, False Claims Act matters, shareholder litigation related to the 2013 restatement, and the $401 million PEMEX/PEP arbitration receivable. Timing and ultimate collection of the PEMEX/PEP award remain uncertain.
- Claims and accounts receivable included $401 million related to the PEMEX/PEP arbitration, $180 million of U.S. government claims and $576 million of total noncurrent claims and accounts receivable. The company believes the amounts are probable of collection, but recovery depends on litigation, arbitration or government-contract resolution.
- Management identified customer concentration risk: Chevron represented 12% of consolidated revenue for the six months ended June 30, 2015.
Important Facts for Investors to Verify
- Whether improved earnings are sustainable after excluding the $28 million Building Group gain, the $15 million prior-period error correction and negotiated project settlements.
- Cash conversion and working-capital requirements, given $139 million of operating cash use despite $106 million of year-to-date net income attributable to KBR.
- Progress and final costs on the two loss-making power projects and remaining Canadian projects.
- Renewal or amendment of the revolving credit facility and maintenance of covenant headroom.
- Collection timing and litigation outcomes for the $401 million PEMEX/PEP receivable and U.S. government claims.
- Impact of reduced oil-and-gas capital spending, lower LNG activity and customer project delays on revenue and backlog conversion.
- Completion and economics of the announced partnerships and planned Canadian pipe-fabrication transaction.