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KBR > SEC Filings for KBR > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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Form 10-Q for KBR, INC.


31-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The purpose of management's discussion and analysis ("MD&A") is to disclose material changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. The MD&A should be read in conjunction with the condensed consolidated financial statements and accompanying notes and to our 2013 Annual Report on Form 10-K/A.

Executive Overview

Business Reorganization

During 2013, we reorganized our business to better serve our customers, improve our organizational efficiency and achieve future growth objectives. In order to attain these objectives, we separated our Hydrocarbons reportable segment into two reportable segments, Gas Monetization and Hydrocarbons. Our five reportable segments are Gas Monetization, Hydrocarbons, IGP, Services and Other. Each reportable segment, excluding Other, is led by a separate Segment President who reports directly to our Chief Operating Decision Maker ("CODM"). We have revised our business segment reporting to reflect our current management approach and recast prior periods to conform to the current business segment presentation.

The five business segments are consistent with our reporting under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
280 - Segment Reporting and are described below.

Business Environment

Demand for our services depends primarily on the level of capital expenditures in our market sectors, which is driven generally by global and regional economic growth and more specifically by the demand for energy products. We see long-term growth in energy projects, including demand for related licensed process technologies, offshore oil and gas production, refining, chemicals, petrochemicals and fertilizers. Upstream and downstream investment plans are advancing in resource-rich areas such as North America, the Middle East, Russia, Asia, Australia, the North Sea and East and West Africa. Each of these trends lends to our particular capability to deliver large projects in remote locations and austere environments.

Gas Monetization. Our Gas Monetization business segment designs and constructs liquefied natural gas ("LNG") and gas-to-liquids ("GTL") facilities that allow for the development and transportation of energy resources around the world. We provide our customers with a full range of services from front-end engineering through engineering, procurement and construction ("EPC"), commissioning and start-up for world-class LNG and GTL projects, along with solutions related to advancing gas processing development, equipment design and innovative construction methods.

Gas Monetization is actively pursuing new LNG prospects but is not expecting an EPC award on these prospects until 2015 and beyond. The new projects for LNG liquefaction and GTL facilities tend to be located near large natural gas resources. World LNG demand growth is projected to support a number of new projects and capacity expansions. The current growth in shale gas production in North America has led to a number of major LNG project developments where we are working in early contract phases on the United States Gulf Coast and Western Canada. We also continue to pursue EPC opportunities for new LNG projects in East Africa and Russia as well as capacity expansions at existing LNG facilities in Asia and Australia.

Hydrocarbons. Our Hydrocarbons business segment provides services ranging from pre-feasibility studies and front-end engineering design ("FEED") through to construction and commissioning of process facilities in a variety of remote and developed locations around the world. We design and construct oil and natural gas production facilities including fixed and floating platforms and floating liquefied natural gas facilities. In addition, we provide specialty consulting services that include field development studies and planning, structural integrity management and proprietary designs for ship and semi-submersible hulls. We also own and license our technologies and provide basic engineering and design packages for highly efficient differentiated proprietary process technologies related to the oil and gas, refining, chemicals, petrochemical, biofuels, fertilizers, coal gasification and syngas markets.

The abundant shale gas supplies in North America have also been driving renewed interest in petrochemical project investments. We continue to be engaged in early-stage activities, FEED work and EPC projects, utilizing our process technologies and project-delivery skills reflecting this renewed interest, and we expect the global hydrocarbons markets to continue to improve in 2014 with energy demand driven by long-term global GDP growth.


Infrastructure, Government & Power. Our IGP business segment designs and executes projects for industrial, commercial and governmental agencies worldwide. These projects range from basic deliverables to complex infrastructure initiatives including aviation, road, rail, maritime, water, wastewater and pipeline projects. Our capabilities include operations, maintenance, logistics and field support, facilities management and border security, and design or build services. Our suite of services includes project management, construction management, training, and visualization software, as well as engineering, construction and project management services across the world.

Industries served by this segment include support for the U.S., United Kingdom ("U.K.") and Australian government operations, as well as diverse infrastructure markets including electric power generation, transportation and water facilities and industrial markets including mining, minerals and other industrial customers. We continue to believe opportunities for our services are growing with non-U.S. governments and with electric power generating companies investing in new natural gas-fired power generation plants in the U.S. and/or projects to improve air emissions at existing coal-fired power plants.

On January 1, 2014, we reorganized four of the five reporting units in the Infrastructure, Government and Power ("IGP") business segment into three geographic-based units.

Services. Our Services business segment delivers direct-hire construction and construction management for stand-alone construction projects in a variety of global markets as well as construction execution support on all U.S. EPC projects. We provide module assembly, fabrication and maintenance services, commissioning/startup and turnaround expertise worldwide to a broad variety of markets including oil and gas, petrochemicals processing, mining, power, alternate energy, pulp and paper, industrial and manufacturing and consumer product industries. Our Services business segment also provides global maintenance, on-call construction, turnaround and specialty services where today more than 90 locations have embedded KBR personnel that provide commercial general contractor services for education, food and beverage, manufacturing, health care, hospitality and entertainment, life science and technology and mixed-use building customers. Our Services business segment periodically works on projects with other business segments.

Other. Our business segment information has been prepared in accordance with ASC
280 - Segment Reporting. Certain of our reporting units meet the definition of operating segments contained in ASC 280 - Segment Reporting, but individually do not meet the quantitative thresholds as a reportable segment, nor do they share a majority of the aggregation criteria with another operating segment. These operating segments are reported on a combined basis as "Other" and include our Ventures and Technical Staffing Resources (formerly a part of Allstates Technical Services) as well as corporate expenses not included in the operating segments' results.

Ventures invests capital, together with customers, lenders and other sources, in projects where one or more of KBR's other business segments has a direct role in technology supply, engineering, construction, construction management or operations and maintenance. Project investments have been made in business sectors including defense equipment and housing, toll roads and petrochemicals. On an ongoing basis, the Company continues to evaluate opportunities for investment in government privatization, infrastructure and hydrocarbon projects where other KBR services are expected to be utilized.

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

Overview of Financial Results

The financial results for the second quarter of 2014 improved from the first quarter of 2014 but remain less than what we consider acceptable. These results were also down when compared to the second quarter of 2013, and in both cases the under-performance was driven by our Services and IGP business segments. Our Gas Monetization and Hydrocarbons business segments continued to benefit from low natural gas costs, which is driving activity in LNG, upstream, downstream and technology related projects. The Hydrocarbons business segment continued to experience a shift in the project mix resulting in an increase in lower margin EPC projects compared to higher margin technical services projects in the prior year. The IGP business segment's results were impacted by a decline in overall volumes in our U.S. government support and logistics, infrastructure and minerals businesses and lower margins due to higher estimated costs to complete one of our North American power projects. The Services business segment's pipe fabrication and module assembly business in Canada remained weak as it continues to work through existing loss projects.
As indicated in our Form 10-K/A for the year ended December 31, 2013, one of the Canadian pipe fabrication and module assembly contracts in our Services business segment that is in a loss position is a master services-type agreement that provides our client with the right, but not the obligation, to place new pipe fabrication and module assembly orders until 2017. We have not received any new orders under this agreement in 2014.


The information below is an analysis of our consolidated results for the three months ended June 30, 2014. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments.

Revenues Three Months Ended June 30, 2014 vs. 2013 Millions of dollars, except for percentages 2014 2013 $ % Revenues $ 1,659 $ 1,950 $ (291 ) (15 )%

Consolidated revenues decreased in the second quarter of 2014 compared to the same period of the prior year. This decrease was primarily driven by reduced volumes resulting from the completion or near completion of projects in our Gas Monetization and Services business segments and lower overall volumes associated with our U.S. government support and logistics activities in Iraq within our IGP business segment. This decrease was partially offset by higher revenues in our Hydrocarbons business segment related to EPC contracts for downstream ammonia, urea and ethylene projects in North America.

Gross Profit Three Months Ended June 30, 2014 vs. 2013 Millions of dollars, except for percentages 2014 2013 $ % Gross Profit $ 28 $ 140 $ (112 ) (80 )%

Consolidated gross profit decreased in the second quarter of 2014 compared to the same period of the prior year. This decrease was primarily attributable to increases in estimated losses at completion of $41 million related to our Canadian pipe fabrication and module assembly projects in our Services business segment and a $14 million charge due to higher expected costs at completion on a power project in our IGP business segment. The decrease was also attributable to reduced volume as we reached peak activity in the second quarter of 2013 on a project in our Gas Monetization business segment and additional fees and cost recoveries recognized on the same project in the second quarter of 2013 which did not recur in the second quarter of 2014.

General and Administrative Expenses                         Three Months Ended June 30,
                                                                                    2014 vs. 2013
Millions of dollars, except for percentages     2014             2013               $             %
General and administrative expenses         $      (60 )     $      (63 )     $         3            5 %

General and administrative expenses decreased in the second quarter of 2014 compared to the same period of the prior year primarily due to reduced overhead costs resulting from headcount reductions and cost savings initiatives implemented at the end of 2013. Our general and administrative expenses for the three months ended June 30, 2014 and 2013, included $12 million and $11 million, respectively, related to our enterprise resource planning ("ERP") project. These amounts include $4 million and a negligible amount, respectively, of amortization on the completed phase of the project.

Interest Expense, net of Interest Income Three Months Ended June 30, 2014 vs. 2013 Millions of dollars, except for percentages 2014 2013 $ % Interest expense, net of interest income $ (2 ) $ (1 ) $ (1 ) (100 )%

Interest expense, net of interest income increased in the second quarter of 2014 compared to the same period of the prior year. This increase was primarily attributable to interest on tax related items under a tax sharing agreement recorded in "payable to former parent" on our condensed consolidated balance sheets. See Note 13 for further discussion related to our transactions with our former parent.


Foreign Currency Three Months Ended June 30, 2014 vs. 2013 Millions of dollars, except for percentages 2014 2013 $ % Foreign currency gains (losses) $ (4 ) $ 4 $ (8 ) (200 )%

In the second quarter of 2014 we had foreign currency losses as compared to foreign currency gains in the same period of the prior year. These losses were primarily attributable to unfavorable shifts in U.S. dollar positions in projects in our Gas Monetization business segment.

Provision for Income Taxes Three Months Ended June 30, 2014 vs. 2013 Millions of dollars, except for percentages 2014 2013 $ % Income before provision for income taxes $ 18 $ 126 $ (108 ) (86 )% Provision for income taxes $ (10 ) $ (15 ) $ 5 33 %

The decline in the provision for income taxes was principally driven by lower pretax book income, but was offset by increased valuation allowances of $10 million associated with our losses recognized in our Canada pipe fabrication and module assembly business during the three months ended June 30, 2014.

Information relating to the reconciliation between our effective tax rates for the three months ended June 30, 2014 and June 30, 2013 to the U.S. statutory federal rate is described in Note 10 to our condensed consolidated financial statements. Information regarding permanently reinvested amounts is described in Note 3 to our condensed consolidated financial statements.

Net Income Attributable to Noncontrolling
Interests                                                  Three Months Ended June 30,
                                                                                  2014 vs. 2013
Millions of dollars, except for

percentages 2014 2013 $ % Net income attributable to noncontrolling interests $ (16 ) $ (21 ) $ 5 (24 )%

Net income attributable to noncontrolling interests decreased in the second quarter of 2014 compared to the same period of the prior year. This decrease is primarily due to additional fees and cost recoveries which were recognized in our Gas Monetization business segment in the second quarter of 2013 but did not recur in the second quarter of 2014.


Results of Operations by Business Segment

We analyze the financial results for each of our five business segments. The
business segments presented are consistent with our reportable segments
discussed in Note 2 to our condensed consolidated financial statements.

For purposes of reviewing the results of operations, gross profit is calculated
as business segment revenues less cost of revenues, which includes business
segment overhead costs directly attributable to the business segment.
                                                       Three Months Ended June 30,
                                                                            2014 vs. 2013
Millions of dollars                          2014          2013            $             %
Revenues
Gas Monetization                          $     362     $     593     $    (231 )        (39 )%
Hydrocarbons                                    533           344           189           55  %
Infrastructure, Government and Power            315           375           (60 )        (16 )%
Services                                        439           620          (181 )        (29 )%
Other                                            10            18            (8 )        (44 )%
Total                                     $   1,659     $   1,950     $    (291 )        (15 )%

Gross profit (loss)
Gas Monetization                          $      48     $      80     $     (32 )        (40 )%
Hydrocarbons                                     34            44           (10 )        (23 )%
Infrastructure, Government and Power            (20 )           8           (28 )       (350 )%
Services                                        (40 )          20           (60 )       (300 )%
Other                                             5             5             -            -  %
Labor cost not allocated to the business
segments - favorable (unfavorable)                1           (17 )          18          106  %
Total                                     $      28     $     140     $    (112 )        (80 )%

Equity in earnings of unconsolidated
affiliates
Gas Monetization                          $      18     $      17     $       1            6  %
Hydrocarbons                                      -             -             -            -  %
Infrastructure, Government and Power             24            18             6           33  %
Services                                          -             3            (3 )       (100 )%
Other                                             7             8            (1 )        (13 )%
Total                                     $      49     $      46     $       3            7  %

Gain on disposition of assets             $       8     $       -     $       8            -  %

Amounts not allocated to the business
segments
General and administrative expenses       $     (60 )   $     (63 )   $       3            5  %
Total operating income                    $      25     $     123     $     (98 )        (80 )%


Gas Monetization

Gas Monetization revenues decreased by $231 million, or 39%, to $362 million in the second quarter of 2014 compared to $593 million in the same period of the prior year primarily as a result of reduced volumes on a GTL project in Nigeria, an LNG project in Algeria, and two LNG pre-FEED and FEED projects in Australia, as these projects were completed or neared completion. There was also a reduction in volume on one of our LNG projects in Australia, as we reached peak activity in the same period of the prior year, partially offset by increased activity due to project ramp-up on another LNG project in Australia.

Gas Monetization gross profit decreased by $32 million, or 40%, to $48 million in the second quarter of 2014 compared to $80 million in the same period of the prior year primarily due to additional fees and cost recoveries resulting from an increase in the volume of work, which we recognized on the same project in the second quarter of 2013 but did not recur in the second quarter of 2014. Also contributing to the decline was reduced progress as we reached peak activity in the second quarter of 2013 on one of our LNG projects in Australia.

Hydrocarbons

Hydrocarbons revenues increased by $189 million, or 55%, to $533 million in the second quarter of 2014 compared to $344 million in the same period of the prior year. This increase in revenues was primarily driven by progress on EPC contracts for downstream ammonia, urea and ethylene projects in North America.

Hydrocarbons gross profit decreased by $10 million, or 23%, to $34 million in the second quarter of 2014 compared to $44 million in the same period of the prior year. This decrease in gross profit was driven by the completion of EPC and technical services projects in prior periods, lower volume of technology license fees and higher proposal costs.

Infrastructure, Government and Power

IGP revenues decreased by $60 million, or 16%, to $315 million in the second quarter of 2014 compared to $375 million in the same period of the prior year. This decline was driven by a $71 million reduction in revenues following the March 31, 2014 completion of activities on the LogCAP IV contract supporting the U.S. military and the U.S. Department of State in Iraq. The decline in revenues was also partially attributable to reduced volumes due to close-out activities on the LogCAP III and RIO contracts ("IGP Legacy Projects"). Revenues from our IGP Legacy Projects decreased from $21 million in the second quarter of 2013 to less than $1 million during the second quarter of 2014. There was also reduced activity on projects in the infrastructure and minerals markets affected by the continuing weak market conditions in the Asia Pacific region as well as large projects nearing completion in our other markets. These decreases were partially offset by growth on an air quality control project and new awards of an EPC contract for a gas fired electric power generation project in the U.S. and U.S. government construction and base support contracts in Europe and Africa.

IGP gross profit decreased by $28 million, or 350%, to a loss of $20 million in the second quarter of 2014 compared to gross profit of $8 million in the same period of the prior year. The reduction in gross profit was driven by a $14 million charge due to higher costs at completion of a power project in North America, as well as a $9 million reduction resulting from the completion of activities on the LogCAP IV contract discussed above. In addition, the reduction in gross profit was driven by a $6 million decrease in costs and other fees related to close-out activities and additional legal fees on our IGP Legacy Projects discussed above and reduced volume related to the completion or near completion of projects in the Asia Pacific region and other markets. Partially offsetting these reductions was improved profitability resulting from overhead savings due to restructuring and other cost savings initiatives.

IGP equity in earnings in unconsolidated affiliates increased by $6 million, or 33%, to $24 million in the second quarter of 2014 compared to $18 million in the same period of the prior year. This increase was driven primarily by an insurance recovery and reduced costs of $15 million on a joint venture for a U.K. MoD project, partially offset by a reduction in volume as we near completion of construction activities on this joint venture project.

Services

Services revenues decreased by $181 million, or 29%, to $439 million in the second quarter of 2014 compared to $620 million in the same period of the prior year. This change was primarily driven by declining construction volume due to the completion or near completion of several construction projects in the U.S. and Canada, partially offset by increased activity in Canadian pipe fabrication and module assembly projects.


Services gross profit decreased by $60 million to a loss of $40 million in the second quarter of 2014, compared to profit of $20 million in the same period of the prior year. This change was primarily driven by losses of $41 million due to increases in estimated losses at completion on certain Canadian pipe fabrication and module assembly projects and a decline in the volume of construction projects in the U.S. and Canada.

Services equity in earnings in unconsolidated affiliates, decreased $3 million in the second quarter of 2014 compared to the same period of the prior year primarily because one of the vessels for MMM was out of contract until May 2014. The vessel has returned to service and improved utilization is expected in the future.

Other

Other revenues decreased by $8 million, or 44%, in the second quarter of 2014 compared to the same period of the prior year, primarily driven by the loss of revenues due to the sale of the external portion of our former Allstates Technical Services business in the fourth quarter of 2013.

Changes in Estimates

Information relating to our changes in estimates is described in Note 2 to our
condensed consolidated financial statements.

Labor Cost not allocated to the Business
Segments                                                 Three Months Ended June 30,
                                                                               2014 vs. 2013
Millions of dollars, except for
percentages                                   2014          2013              $               %
Labor cost not allocated to the business
segments - favorable (unfavorable)        $        1     $     (17 )   $       18              106 %

Labor cost not allocated to the business segments represents costs incurred by our central labor and resource departments net of the amounts charged to the business segments. Labor cost over-absorption was $1 million in the second quarter of 2014 compared to under-absorption of $17 million in the same period of the prior year. Labor cost absorption improved primarily due to a combination of increased chargeability, reduced headcount and cost reductions. In addition, labor cost absorption benefited from an office closure in North America in the second quarter of 2013.

Six months ended June 30, 2014 compared to the six months ended June 30, 2013

Overview of Financial Results

The financial results for the first six months of 2014 did not meet our expectations largely due to the under-performance of our Services and IGP business segments. Our Gas Monetization and Hydrocarbons business segments continued to benefit from low natural gas costs, which is driving activity in LNG, upstream, downstream and technology related projects. Our Hydrocarbons segment continued to experience a shift in the project mix resulting in an increase in lower margin EPC projects compared to higher margin technical services projects in the prior year. The IGP business segment's results were impacted by a lack of new awards, a decline in overall volumes in our U.S. Government support and logistics, infrastructure and minerals businesses, from . . .

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