KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The request metadata identifies “2011 Q3,” but the filing itself is KBR’s third-quarter 2012 Form 10-Q, filed October 24, 2012.
Business context
KBR is a global engineering, construction and services company serving hydrocarbons, infrastructure, government, power, minerals, industrial and commercial markets. Reportable segments are Hydrocarbons, Infrastructure, Government and Power, Services and Other. The filing highlights the completion of most LogCAP III operations in Iraq in December 2011, continued LogCAP IV support, growth in major LNG projects and deterioration in minerals markets.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $1,992 million vs. $2,387 million | $6,055 million vs. $7,165 million |
| Operating income | $(11) million vs. $138 million | $230 million vs. $451 million |
| Net income attributable to KBR | $(81) million vs. $185 million | $114 million vs. $390 million |
| Diluted EPS | $(0.55) vs. $1.22 | $0.76 vs. $2.55 |
| Operating margin | Approximately (0.6)% vs. 5.8% | Approximately 3.8% vs. 6.3% |
| Cash flow from operations | Not separately provided | $(11) million vs. $312 million |
Third-quarter revenue declined 17%, while nine-month revenue declined 15%. The third-quarter loss and nine-month earnings decline primarily reflect a $178 million noncash goodwill impairment charge in the Minerals reporting unit, a $28 million pretax reduction of revenue related to a U.S. government dining-facility ruling, lower government logistics activity and weaker Services performance. The tax provision was $45 million in the quarter and $73 million year to date; nine-month results included approximately $42 million of discrete tax benefits.
- Hydrocarbons: Nine-month revenue increased 3% to $3.36 billion and segment income increased 38% to $427 million, driven by Gorgon, Skikda and Ichthys LNG activity, change orders and milestone awards.
- Infrastructure, Government and Power: Nine-month revenue fell 45% to $1.44 billion and segment income declined to a loss of $82 million, including the goodwill impairment. North America Government and Logistics revenue fell 70% following LogCAP III completion.
- Services: Nine-month revenue decreased 2% to $1.19 billion and segment income decreased 35% to $28 million, principally because of increased estimated costs on U.S. fixed-price construction projects and project completions.
- Backlog: $14.82 billion at September 30, 2012, up from $10.93 billion at December 31, 2011. Hydrocarbons backlog increased substantially because of the approximately $5.6 billion Ichthys LNG award. Management estimated 44% would be executed within one year; 40% was fixed-price and 60% cost-reimbursable.
Liquidity, debt and cash flow
- Cash and equivalents were $846 million at September 30, 2012, down from $966 million at year-end 2011. Approximately $201 million was held by consolidated joint ventures and was restricted to project activities.
- Operating cash flow was negative $11 million year to date, primarily because of working-capital requirements, including increases in receivables and unbilled contract receivables.
- Capital expenditures were $53 million; financing cash uses included $36 million of share repurchases, $22 million of dividends and $10 million of debt repayments.
- KBR had a $1 billion unsecured revolving credit facility expiring in December 2016. At September 30, 2012, there were no borrowings and $222 million of letters of credit outstanding under the facility.
- Total nonrecourse project-finance debt of consolidated variable-interest entities was $98 million. This debt is stated to be nonrecourse to KBR.
- KBR reported approximately $2 billion of committed and uncommitted letter-of-credit capacity, with $671 million utilized. Management stated that liquidity and letter-of-credit capacity were adequate for the next 12 months.
Material changes, outlook and unusual items
- The Minerals reporting unit experienced deteriorating market conditions and lower projected revenue, income and cash flows. KBR recorded a $178 million noncash goodwill impairment, reducing Minerals goodwill from $263 million to $85 million. Further impairment remains possible if market conditions or projected results deteriorate.
- LogCAP III operations in Iraq effectively ended in December 2011, causing a substantial year-over-year decline in North America Government and Logistics revenue. Government activity is expected to continue declining as U.S. and U.K. troop levels fall, although KBR identified continuing logistics and infrastructure opportunities in the Middle East.
- Management cited favorable long-term demand prospects in LNG, energy infrastructure, petrochemicals, offshore oil and gas, technology licensing and selected international infrastructure markets. No specific consolidated earnings or revenue guidance was provided in the filing.
- Probable claims and unapproved change orders included in contract receivables totaled $144 million and $26 million, respectively. KBR recognized $106 million of additional contract revenue related to probable claims on an LNG EPC contract.
- KBR had $206 million of government-contract claims in receivables, including $124 million related primarily to disputed or de-obligated task-order funding and $82 million for pending incremental funding.
- DCAA Form 1 notices recommended suspension of approximately $335 million of prior-year contract costs; $141 million had been withheld from current billings. The company also reported $96 million of government demands for disallowed costs that it believes it is not legally obligated to pay.
- In connection with the Petrobras bolts arbitration, KBR recorded a $210 million liability and a corresponding $210 million indemnification receivable from Halliburton. KBR is challenging the arbitration award.
- KBR had approximately $80 million of performance bonds related to PEMEX projects and a long-term receivable associated with a $351 million arbitration award, but the timing and ultimate collection remain uncertain.
- On October 15, 2012, KBR agreed to sell its Clinton Drive property and expected to recognize a gain upon closing.
Key investor verification points
- Verify the recoverability of the remaining Minerals goodwill and the sensitivity of the impairment analysis to commodity markets, forecasts and the 16% discount rate used.
- Monitor conversion of the $14.82 billion backlog into revenue and cash, particularly the large Ichthys LNG award and the mix of fixed-price contracts.
- Assess working-capital requirements, collections of unbilled receivables and the sustainability of operating cash flow after the year-to-date outflow.
- Track DCAA audits, government withholdings, disputed costs, claims and related litigation, including the private-security, dining-facility and construction-services matters.
- Evaluate the collectability and timing of the Petrobras indemnification receivable and PEMEX arbitration receivable.
- Consider customer concentration: Chevron represented 28% of nine-month 2012 revenue and Sonatrach represented 10%.
- Review exposure to project execution, liquidated damages, fixed-price cost overruns, government spending reductions, geopolitical conditions, foreign exchange and information-technology disruption.