Q3 2011 Earnings Call

October 27, 2011 9:00 am ET


Susan K. Carter - Chief Financial Officer and Executive Vice President

William P. Utt - Chairman, Chief Executive Officer and President

Rob Kukla - Director of Investor Relations


Jamie L. Cook - Crédit Suisse AG, Research Division

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Steven Fisher - UBS Investment Bank, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

Chase Jacobson - William Blair & Company L.L.C., Research Division

Unknown Analyst -

John Rogers - D.A. Davidson & Co., Research Division



Good day, ladies and gentlemen. Welcome to the KBR's Third Quarter 2011 Earnings Conference, hosted by KBR. This call is being recorded. [Operator Instructions] Now for opening remarks and introductions, I would like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Rob Kukla

Thanks, Erin, and good morning, and welcome to KBR's Third Quarter 2011 Earnings Conference Call. Today's call is also being webcast, and a replay will be available on KBR's website for 7 days. The press release announcing the third quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, Executive 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, 2010, KBR's quarterly reports on Forms 10-Q and KBR's current reports on Forms 8-K.

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

William P. Utt

Thanks, Rob, and good morning, everyone. Overall, I am pleased with KBR's execution and progress across our businesses. KBR's third quarter net revenue was in line with our expectations, and excluding the LogCAP project, is up 5% year-over-year. Now I would like to talk about some of the unusual accounting and tax impacts arising in the third quarter. During the third quarter, as a result of a scheduled reforecast of the remaining work on the Gorgon project, we increased our forecast man-hour backlog for the work we expect to perform over the remainder of the project. This backlog increase reduced the project's percentage of completion, and as a result, reduced our job income on the project. This reduction in job income was offset in part in net income attributable to noncontrolling interest. These amounts will be recovered over the remaining life of the project.

Also during the third quarter, KBR received notice of an arbitration award of approximately $193 million in the Barracuda Caratinga arbitration. This award, for which KBR is indemnified by our prior parent, created a book tax benefit for KBR in the amount of $68 million. The award will be tax deductible by KBR when the award is paid. The indemnity payments to KBR are treated as a nontaxable contribution to capital for tax purposes.

Finally, during the third quarter, KBR received information from the Australian receiver controlling our former investment in an Australian railroad venture, which allowed us to release a $24 million deferred tax liability related to our share of the Australian railroad investment. As a result of these impacts, as well as the continuing strength of our business, our 2011 guidance is $3.15 to $3.30 per share.

Now let's talk about KBR businesses. KBR's backlog at September 30 was $11.7 billion. Compared to the prior year third quarter, KBR's job income backlog has increased 11%, while revenue backlog is down 5%. Compared to the last quarter, job income backlog increased 1% despite a 2% revenue backlog decline.

Approximately 75% of the revenue backlog decline this quarter was related to a reforecast of the Escravos' estimate to complete, and FX impacts. Quarter-over-quarter, Hydrocarbons' backlog declined $674 million primarily due to project work off. IGP's backlog was up $313 million, led by work additions on the LogCAP III and IV projects, including $300 million of definitized work for our Base Life Support task order for the Department of State's mission in Iraq, as well as the award of a construction services contract for the Plant Radcliffe coal gasification project in Mississippi. Services backlog increased $21 million from the second quarter as a result of the Plant Scherer and other U.S. construction project awards. We also continue to see increased activity at our North American-focused businesses.

Now I would like to comment on a few of our projects. In Australia, KBR and our partners remain actively engaged in post-FEED and pre-FID activities on the impacts of this LNG project, and the open book tender discussions continue to proceed towards a fourth quarter 2011 FID. At the Pluto LNG project, KBR continues to provide support to Woodside on the Pluto foundation project on an as-needed basis and is currently performing various additional studies on the proposed expansion project. At the Browse LNG project, the FEED is wrapping up, and we expect to move to a big quality FEED extension during the fourth quarter. Permitting and industrial relations activities are ongoing, and the project continues to anticipate a 2012 FID.

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