Q2 2010 Earnings Call

July 29, 2010 11:00 am ET


William Utt - Chairman, Chief Executive Officer and President

Susan Carter - Chief Financial Officer and Senior Vice President

Rob Kukla - Director of Investor Relations


Barry Bannister - Stifel, Nicolaus & Co., Inc.

Vance Edelson - Morgan Stanley

John Rogers - D.A. Davidson & Co.

Andy Kaplowitz - Barclays Capital

Joseph Ritchie - Goldman Sachs Group Inc.

Steven Fisher - UBS Investment Bank



Good day, and welcome to the KBR Second Quarter 2010 Earnings Call. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Rob Kukla

Thank you, Melissa. Good morning, and welcome to KBR's Second Quarter 2010 Earnings Conference Call. Today's call is also being webcast, and a replay will be available on KBR's website for seven days. The press release announcing the second quarter results is also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, our Senior Vice President and Chief Financial Officer.

In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance, financial position, backlog and other financial items. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31, 2009, KBR's quarterly reports on Forms 10-Q and KBR's current reports on Form 8-K.

Now I'll turn the call over to Bill Utt. Bill?

William Utt

Thanks, Rob, and good morning, everyone. I would like to start today's call with our updated guidance for the full year 2010, which you saw in this morning's earnings press release. We have raised KBR's 2010 guidance range to $1.75 to $2 per diluted share from the earlier guidance of $1.50 to $1.80 per diluted share. The updated guidance takes into account the recently announced award fees for LogCAP III, which were not in the previous guidance, as well as a generally stronger performance in our operating businesses.

Also, KBR anticipates that the 2010 LogCAP revenues will now be approximately 60% of the 2009 levels compared to approximately 50% reflected in the previous guidance. Sue will provide more detail on our updated guidance later in the call.

Before making comments on KBR's discrete business units, I would like to discuss KBR's backlog. As we have discussed over the past several quarters and as highlighted during our Analyst and Investor Day at the end of June, we have been focused on creating a more profitable backlog. Compared to the second quarter of 2009, job income backlog was up 26% relative to a 1% increase in revenue backlog. Sequentially, KBR's job income backlog was flat despite a 7% decline in revenue backlog.

For our Gas Monetization business unit, during the second quarter, KBR received change orders for the Yemen LNG project of approximately $43 million, resulting in an after-tax EPS contribution of $0.17 per diluted share. However, during the quarter, KBR also reviewed and assessed our reserve for subcontractor claims, which resulted in an increase in the amount of anticipated subcontractor claims on the Yemen project. That resulted in a net $7 million charge to KBR.

For the Tangguh LNG project, the plan is fully operational and shipping LNG. We continue to maintain an ongoing dialogue with the customer to close out the project that conclude final project change orders, although the timing of receipt of these change orders remains uncertain at this time.

The Gorgon LNG, Pearl GTL and Skikda LNG projects were positive contributors to this quarter's results. The Inpex Ichthys FEED and the Pluto FEED, as well as the Browse LNG basis of design projects, are proceeding as planned and also contributed nominally to the quarter's results.

For our Oil & Gas business unit, we are continuing to work on a number of FEED projects that were awarded last year and expect these FEEDs to move into detailed design during 2010. Oil & Gas' revenue backlog was up 96% sequentially as we had a substantial work release on an ongoing oil project in the Caspian region.

During the second quarter, the Oil & Gas business unit results were adversely impacted by charges related to legal costs in the ongoing legacy Barracuda-Caratinga arbitration in the amount of $4 million. For our Downstream business unit, the Yanbu Project has received final investment approval. Earlier this week, final EPC contracts were executed for several major construction packages on the Yanbu Project, and the second and final phase of this project has commenced.

KBR will now begin to staff the EPC project offices, continue detailed design of procurement services on the interconnections and utilities packages and better define our anticipated construction management role over the coming quarters.

Also, the Ras Tanura Integrated Project FEED continues to progress well. We continue to increase staff to meet FEED completion targets, with an expected completion in the third quarter of 2011.

Also in Saudi Arabia, the Saudi Kayan ethylene project has commenced its performance testing and has produced ethylene during test production runs. The two refinery projects in Africa continue to move forward and negotiations continue for the first phases of the EPC end packages [ph](22:01) for the Lobito refinery project in Angola.

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