KBR, INC. quarterly report, Q2 FY2009

KBR, Inc. Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2009. The request metadata identifies “2008 Q2,” but the filing itself is a 2009 second-quarter Form 10-Q, issued July 30, 2009.

Business Context and Reporting Period

KBR is a global engineering, construction and services company serving government, energy, petrochemical, industrial and infrastructure customers through Government and Infrastructure, Upstream, Services, Downstream, Technology and Ventures businesses. Results are materially influenced by a relatively small number of large projects and joint ventures.

Management reported that the global economic downturn, lower energy prices and financial-market conditions were delaying or deferring customer capital projects, although KBR had not experienced a significant overall impact through June 30, 2009. LogCAP III work was transitioning toward LogCAP IV and was expected to decline over time.

Financial Results and Key Metrics

Metric	Three months ended June 30	Six months ended June 30
Total revenue	$3.101 billion, versus $2.658 billion	$6.301 billion, versus $5.177 billion
Operating income	$137 million, versus $90 million	$281 million, versus $244 million
Net income attributable to KBR	$67 million, versus $48 million	$144 million, versus $146 million
Diluted EPS	$0.42, versus $0.28	$0.89, versus $0.86
Operating margin	Approximately 4.4%, versus 3.4%	Approximately 4.5%, versus 4.7%
Net margin attributable to KBR	Approximately 2.2%, versus 1.8%	Approximately 2.3%, versus 2.8%

Revenue increased 17% in the second quarter and 22% year to date. Services growth largely reflected the July 2008 BE&K acquisition; Upstream also benefited from higher activity on major gas monetization projects.
Second-quarter operating income increased 52%, while six-month operating income increased 15%.
Six-month net income attributable to KBR declined slightly despite higher operating income, primarily because interest income fell to $1 million from $25 million and 2008 included favorable items that did not recur.
Effective tax rates were approximately 37% in 2009, compared with 36% in the comparable 2008 periods.
Cash and equivalents were $1.077 billion at June 30, 2009, compared with $1.145 billion at December 31, 2008. Approximately $321 million was restricted or otherwise unavailable for general corporate purposes, including joint-venture and project advance payments.
Cash used in operations was $8 million for the first six months, compared with $284 million used in the prior-year period. Investing cash use was $13 million, and financing cash use was $59 million.
The $930 million revolving credit facility had no cash borrowings and $548 million of outstanding letters of credit, leaving $382 million of availability. KBR was in compliance with applicable financial covenants.
Total liabilities were $3.447 billion and total shareholders’ equity was $2.200 billion at June 30, 2009. The filing does not present a separate consolidated total-debt balance; it reports no cash draws under the revolving facility.
Backlog was $12.346 billion, down from $14.097 billion at December 31, 2008. Approximately 53% was expected to be completed within one year, with 79% attributable to cost-reimbursable contracts.

Material Changes Versus the Prior Comparable Period

Government and Infrastructure revenue declined 8% in the second quarter and 3% for the six months, primarily because of lower international and U.S. government activity, although Middle East operating income improved.
Upstream revenue increased 13% in the second quarter and 17% year to date. Gas Monetization benefited from Escravos GTL, Skikda LNG, Gorgon LNG and other projects; Pearl GTL progress was lower.
Services revenue increased 356% in the second quarter and 388% year to date, primarily due to the BE&K acquisition. Services operating income increased 71% and 77%, respectively.
Upstream six-month operating income declined 4%, reflecting the absence of a $51 million favorable PEMEX arbitration item recognized in 2008 and a $15 million loss related to the In Amenas arbitration in 2009.
The Skopje Embassy project reached substantial completion in March 2009, and no additional project losses were recorded after the $60 million cumulative loss recognized through 2008, although warranty-related costs remain possible.
KBR repurchased approximately 1.5 million shares for $21 million during the first six months and declared quarterly dividends of $0.05 per share.

Guidance, Outlook, Risks and Unusual Items

Management expected LogCAP III work and related backlog to decline as the U.S. government transitions to LogCAP IV, although certain task orders were expected to continue through the second half of 2010.
Management reported modest increases in bidding activity, particularly for smaller North American projects, and potential opportunities from infrastructure stimulus and customers consolidating operations and maintenance providers.
LogCAP award fees were accrued at 72% of potential fees. Approximately $103 million of estimated award fees was included in unbilled receivables, pending a future customer award-fee determination.
KBR LLC pleaded guilty in February 2009 to FCPA violations related to the Bonny Island project. KBR’s remaining DOJ obligation was $252 million at June 30, 2009, while Halliburton had paid the SEC obligation and was indemnifying most of the DOJ liability. A corporate monitor was required for up to three years. Foreign investigations, including a U.K. Serious Fraud Office investigation, continued.
Significant government-contract matters included suspended or disputed costs related to containers, dining facilities, transportation and security. The filing states that potential losses beyond recorded accruals could not be estimated for some matters.
First Kuwaiti arbitration claims totaled approximately $121 million; the TES litigation sought $36 million; Petrobras claimed $220 million plus interest in the Barracuda-Caratinga bolt arbitration; and multiple qui tam, electrocution and burn-pit matters remained unresolved. Outcomes and potential losses were generally not estimable.
Unapproved government claims totaled $61 million and were recognized as probable revenue. Unapproved claims and award-fee estimates are subject to customer review and collection risk.
Potential liquidated damages not accrued totaled $42 million. Environmental remediation accruals were approximately $8 million against a possible range of up to $14 million.
Letters of credit and financial guarantees outstanding under KBR facilities totaled approximately $606 million, with an additional $320 million under Halliburton facilities. Management stated that additional credit capacity was needed to replace Halliburton-supported facilities and support prospective projects.
Estimated losses on uncompleted contracts totaled $61 million, including approximately $50 million related to Escravos, most of which was expected to be funded in 2009.

Investor Verification Checklist

Verify the sustainability of revenue and margins after the BE&K acquisition and as major Upstream projects approach completion.
Monitor LogCAP III work-off, LogCAP IV task-order awards, backlog conversion and the timing of government funding.
Assess collectibility and eventual resolution of the $103 million LogCAP award-fee estimate and $61 million of unapproved government claims.
Review liquidity after considering restricted cash, letters of credit, project-funding commitments, pension contributions and the pending revolving-credit-facility maturity and capacity needs.
Track the FCPA monitor, remaining DOJ payments, foreign investigations and Halliburton indemnification.
Evaluate exposure from Petrobras arbitration, government-contract audits, suspended costs, liquidated damages and other litigation contingencies.
Reconcile the reported $1.077 billion cash balance with cash unavailable for general corporate purposes and confirm the absence of significant additional debt not clearly presented in the condensed statements.