KBR Management Discusses Q2 2012 Results - Earnings Call Transcript

KBR (KBR)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET

Executives

Zachary A. Nagle - Vice President of Investor Relations and Communications

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

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

Analysts

Andy Kaplowitz - Barclays Capital, Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Steven Fisher - UBS Investment Bank, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Brian Konigsberg - Vertical Research Partners Inc.

George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Presentation

Operator

Good day, and welcome to the KBR Second Quarter 2012 Earnings Conference Call hosted by KBR. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Mr. Zac Nagle, Vice President, Investor Relations and Communications. Please go ahead.

Zachary A. Nagle

Thank you. Good morning, and welcome to KBR's Second Quarter 2012 Earnings Conference Call. Today's call is also being webcast and a replay will be available on KBR's website for 7 days at kbr.com. The press release announcing 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, Executive Vice President, Chief Financial Officer.

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 second quarter press release issued last night, KBR's Form 10-Q for the period ended June 30, 2012, and KBR's current report on Form 8-K. You can find all of these documents at kbr.com.

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

William P. Utt

Thanks, Zac, and good morning, everyone. During today's call, I'd like to cover a few key areas. First, I'll walk through a few key takeaways relative to our second quarter performance and make some brief comments on our updated 2012 earnings guidance. Second, I'll provide an update on several of our key prospects. And third, I'll highlight the dynamics we're seeing in our markets.

For the second quarter, KBR delivered $0.70 per fully diluted share. Our performance was better than we had initially expected for Q2 but still generally consistent with our overall expectations for the full year 2012. We initially expected that second quarter earnings before taxes would be a bit better than the first quarter. Our actual results were a fair amount better than those expectations for a number of reasons, a few of which I'll touch on here.

First, as we noted in our Q2 earnings release issued last night, we've seen stronger execution during the quarter on several projects in construction or commissioning, which has allowed us to reduce our forecast cost estimates to complete these projects. Additionally, as we close out these projects, we have to be able to resolve several outstanding issues on these projects, which may present further opportunities for KBR. Second, we've made good progress and have seen scope growth on our other projects beyond our initial expectations as well as realized achievements on several projects we had expected to recognize later in 2012. These projects are progressing well and KBR's execution has been consistently strong. Third, we've maintained our focus on disciplined cost controls across KBR and recognized notable benefit versus forecast in the quarter. In conjunction with this, we've lowered our guidance on corporate G&A to approximately $230 million from our previous guidance of between $240 million and $250 million.

As we think about our updated 2012 earnings guidance, there a number of puts and takes. We presently expect our businesses in Canada and the Middle East to do better than we originally expected, while other businesses, such as North American Government and Minerals, will likely come in lighter than expected. In our Hydrocarbons businesses, we expect 2012 to be better than expected. The improved execution across our portfolio of projects has largely offset the expected earnings contributions from those large projects that have slipped to the right since the beginning of the year. Taking all this into account and coupled with the fact that the balance of 2012 largely sits in front of us today, we have updated our guidance to $2.60 to $2.80 per share.

There are a number of areas of strength in the quarter. Revenue was up 2% and job income was up 4% year-over-year excluding LogCAP, reflecting the continued underlying growth of our businesses and general strength in execution. Consolidated margins also continued to expand. Job income margins and business group margins were both improved, with particular strength in Gas Monetization, where we're delivering strong execution on our projects that I previously discussed. Our Oil and Gas business also had exceptional job income performance in the quarter, where we delivered higher work volumes on a number of projects and also recorded approximately $8 million in license fees for several semi-submersible hulls that were booked in the quarter.

Turning to bookings and backlog. In a challenging awards environment, I'm pleased with our sales results in the second quarter, where we're continuing to win substantial new work, particularly in the non-Hydrocarbons-related business units. In the second quarter, we booked approximately $1.2 billion in new work and added approximately $400 million more in net work scope adjustments. In the second quarter, backlog was negatively impacted by approximately $300 million in foreign exchange adjustments, so the total scope adjustments excluding these foreign exchange impacts were about $700 million.

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