KBR, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the quarter and six months ended June 30, 2014, although the request metadata identifies “2013 Q2.” KBR is a global engineering, procurement, construction and services company serving energy, hydrocarbons, infrastructure, government, power and industrial markets.
Financial Results and Liquidity
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $1.659 billion | $1.950 billion | $3.292 billion | $3.779 billion |
| Gross profit | $28 million | $140 million | $67 million | $296 million |
| Operating income | $25 million | $123 million | $35 million | $256 million |
| Net income attributable to KBR | $(8) million | $90 million | $(51) million | $178 million |
| Diluted EPS | $(0.06) | $0.61 | $(0.35) | $1.20 |
| Cash flow from operations | Not separately presented for the quarter | $20 million | $(97) million |
- Revenue declined 15% year over year in the second quarter and 13% in the first six months.
- Gross margin was approximately 1.7% in the quarter and 2.0% for the six months, versus approximately 7.2% and 7.8%, respectively, in the prior-year periods.
- Operating margin was approximately 1.5% in the quarter and 1.1% for the six months, versus approximately 6.3% and 6.8%, respectively, in the prior-year periods.
- Cash and cash equivalents were $969 million at June 30, 2014, down from $1.106 billion at December 31, 2013. Six-month cash usage included $147 million from financing activities, including $96 million of share repurchases, $24 million of dividends and $25 million of distributions to noncontrolling interests.
- The $1 billion revolving credit agreement had no cash borrowings and $184 million of outstanding letters of credit at June 30, 2014. KBR was in compliance with its financial covenants. Total letters of credit outstanding under all facilities were $649 million.
- Nonrecourse project debt totaled $84 million, consisting of $10 million current and $74 million noncurrent. KBR also reported $107 million payable to former parent Halliburton related to a tax-sharing dispute.
Material Changes Versus the Prior Comparable Period
- Services: Second-quarter gross loss was $40 million versus $20 million of profit in the prior year. Six-month gross loss was $100 million versus $31 million of profit. Canadian pipe fabrication and module assembly projects generated additional estimated losses of $41 million in the quarter and $82 million year to date; the related loss reserve was $115 million at June 30, 2014.
- Infrastructure, Government and Power: Second-quarter gross loss was $20 million versus $8 million of profit; six-month gross loss was $40 million versus $27 million of profit. Results reflected the March 31, 2014 completion of LogCAP IV activities, lower legacy-project volumes, additional legal and close-out costs, and a $14 million charge for higher estimated costs on a North American power project.
- Gas Monetization: Revenue declined 39% in the quarter and 36% year to date as several LNG, GTL and FEED projects were completed or neared completion. Six-month gross profit included a $33 million favorable settlement of claims.
- Hydrocarbons: Revenue increased 55% in the quarter and 44% year to date, primarily from North American ammonia, urea and ethylene EPC projects. Gross profit nevertheless declined because of lower-margin EPC mix, lower technology-license activity, proposal costs and project close-out costs.
- Backlog declined to $12.491 billion at June 30, 2014 from $14.118 billion at December 31, 2013. Approximately 47% was expected to be executed within one year; 44% was fixed-price and 56% cost-reimbursable.
Guidance, Outlook, Risks and Unusual Items
- Management stated that 2014 results were below expectations and that quarterly performance remained below acceptable levels, primarily because of Services and IGP underperformance.
- Management expects long-term demand for LNG, upstream and downstream energy, technology licensing and infrastructure services, but indicated that new Gas Monetization LNG EPC awards were not expected until 2015 or later.
- Canadian loss projects are expected to be completed in 2015 and will require future cash expenditures in excess of customer receipts. Estimates remain subject to labor, subcontractor, productivity, schedule, scope and settlement risks.
- KBR carries $625 million of long-term claims and accounts receivable, including $401 million related to the EPC 1 arbitration award against Mexico’s PEP. Collection timing remains uncertain despite KBR’s expectation of recovery.
- U.S. government contract matters included $266 million of outstanding Form 1 disputes, $137 million withheld by the government, and $61 million of claims loss accruals. Several audits, claims, qui tam actions and False Claims Act proceedings remain unresolved.
- KBR reported material weaknesses in internal control over project estimates involving foreign-currency effects and in the control environment for its Canadian pipe fabrication and module assembly business. The company restated its 2013 financial statements and stated that disclosure controls were not effective as of June 30, 2014.
- Shareholder and derivative litigation related to the 2013 restatement, SEC information requests, the Halliburton tax-sharing dispute, and other legal proceedings could produce additional costs; the filing states that loss probabilities for certain matters cannot yet be determined.
- International cash was $622 million and joint-venture cash was $75 million; some balances are restricted or may incur additional U.S. tax if repatriated.
Investor Verification Checklist
- Verify that the intended reporting period is second-quarter 2014, not second-quarter 2013.
- Reconcile the Canadian project loss reserve, remaining expected losses and projected 2015 cash requirements.
- Review remediation progress for the two material weaknesses and any subsequent restatement or control disclosures.
- Assess collectability and timing of the $401 million EPC 1 receivable and other government claims.
- Monitor backlog conversion, new awards and the effect of LogCAP IV completion on future IGP revenue.
- Review liquidity after share repurchases, dividends, pension contributions, potential Halliburton payments and litigation-related cash outflows.
- Evaluate exposure to fixed-price contracts, liquidated damages, customer concentration, foreign currency movements and unresolved government investigations.