KBR Inc (KBR) 2012 Q2 法說會逐字稿

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 would like to turn the call over on to Mr. Zac Nagle, Vice-President, Investor Relations, and Communications. Please go ahead.

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 seven 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, and 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 30th, 2012 and KBR's current reports on Form 8-K. You can find all of these documents at KBR.com. Now I will turn the call over to Bill. Bill?

Thanks, Zac, and good morning, everyone. During today's call, I would like to cover a few key areas. First, I will walk through a few key takeaways relative to our second-quarter performance, and make brief comments on our updated 2012 earnings guidance. Second, I will provide an update on several of our key prospects, and third, I will highlight the dynamics we are 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 will 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 hope 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 to $230 million from our previous guidance of between $240 million and $250 million.

As we think about our updated 2012 earnings guidance, there are 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 were 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 are 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 am pleased with our sales results in the second quarter where we are 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. For new awards, our services businesses had an exceptionally strong sales quarter.

Backlog was up 27% from the first quarter, anchored by approximately $750 million in bookings across module fabrication, gas processing and turnaround projects in our Canadian operations. Some of these new bookings will be burned in 2012. Additionally we continue to see additional opportunities on the horizon in Canada in an increasingly diverse suite of markets including fabrication, oil sands, mining, construction, turnarounds and field camp services.

Also in Services the Building Group continued to see renewed strength in their commercial institutional construction markets, particularly in the residential market and added $150 million in new work in the quarter. The Building Group expects to maintain this increased order level through the remainder of 2012.

In addition to services, we also saw good backlog growth at Downstream, up 53% sequentially driven by the addition of the newly awarded services work on an Uzbekistan Ethylene project and additional PMC work releases on the Sadara project. As a result of these bookings we expect Downstream's performance to improve in the second half of 2012 as well. While not a big contributor to backlog growth during the quarter, we expect Power and Industrial to see an increase in second half revenues as projects sold in 2011 continue to ramp up. Finally in our Minerals business, we did not have any additional material charges in the second quarter, and we remain confident that these Legacy project issues are behind us.

Before I turn to our prospect update, I want to highlight the significant improvements in the litigation risk profile taking place at our North American Government and Logistics business unit. Over the past year KBR has won a series of legal victories in the Convoy case, the Jones Assault litigation and most recently the Meseth Electrocution case. We believe existing case law is being upheld and expanded largely at the appellate level that maintains well-established protections for contractors providing support to the military in wartime environments.

We expect this growing body of case law to be applied in the remaining Sodium Dichromate and Burn Pit cases involving KBR. Additionally in July we successfully resolved the last of our assault cases pending against KBR. We have also successfully concluded about 70% of the outstanding false claim act, or qui tam suits against KBR. We presently have about six cases remaining to be resolved.

We are pleased with these continuing positive evolutions in our litigation and risk profile over the past months, and you can find disclosure of all material legal matters in our second quarter 10-Q filing.

Now I would like to provide an update on the major prospects we are pursuing. For the Kitimat LNG project we continue to be engaged with the customer on additional FEED analysis and on the EPC open book tendering as the project progresses to FID. For the Brown's LNG project we have submitted our EPC bid. The customer has publicly stated they will make an ultimate decision on the project by the second quarter of 2013. For the Gorgon LNG fourth train project pre-FEED activities continue and we expect a transition into FEED by the end of 2012.

For the Anadarko LNG project in Mozambique, the FEED bids are in and we anticipate awards to be announced soon. For the Pluto LNG project KBR continues to remain engaged in discussions with the customer on the expansion project, and we believe we are well positioned for the EPC work once the customer decides to move forward with this project.

Lastly for the Lobito Refinery project, early stage engineering work is now complete, but we continue to be active with on-site preparation. KBR stands ready to support the customer once they have completed partner discussions and move to FID. We continue to believe we are well positioned on each of these major prospects.

Now I would like to discuss some of the dynamics we are seeing in each of our major markets over the next several quarters. In Australia, we see continued strength in LNG, stable activity in minerals, particularly coal and iron ore and solid opportunities in infrastructure. As we have highlighted since the beginning of the year, cost challenges remain for the major projects, and their timing is a little more complicated than we thought a year ago. We think the underling economics of these projects remain attractive and that these projects will ultimately go forward.

In Asia we've doubled the size of our offices in Beijing which is primarily a technology sales office and in India where we do a lot of our technology process engineering execution. These offices have been instrumental in driving a greater KBR presence in these countries. In China we have received our first Advance Catalytic Olefins technology award as well as a couple of VCC licenses. In Japan, the shift from nuclear power generation is expected to create globally $30 billion of new LNG liquefaction investment.

In the Middle East we continue to see a significant backlog of prospects as well as projects going forward. I commented in prior calls that KBR's backlog of prospects in the Middle East is as strong as it has been in at least three years. In the first quarter we completed the acquisition of AMCDE Engineering as part of the broader Aramco GES Plus initiative to create more Saudi design capability in Kingdom. This acquisition continues to do well and presents strong opportunities for KBR going forward.

On the Sadara project all EPC contracts have been let and we're continuing to perform in Kingdom PMC and construction management oversight for the project. We expect to see additional Sadara PMC and CM awards over the coming years and we expect to maintain a presence on the project for several more years to come. Lastly, we recently opened a KBR office in Baghdad to build on the presence we have had in Iraq from our government activities. As one of the largest private employers in Iraq for several years now, we think we can be a key player as Iraq rebuilds its energy infrastructure, and ultimately its private infrastructure in the coming years, following the increase in oil production.

In Africa our work is picking up with the pre-FEED work we are doing for the Anadarko Mozambique LNG project, commissioning activities for the Skikda LNG project, continuing discussions with the owner group on the Lobito Refinery project coupled with additional offshore activity in Angola and increased activity at our South African operations.

Moving more to Europe and the former Soviet Union we are continuing to perform lots of work in the Caspian region with the Kashagan, Chirag, and Shah Deniz projects where KBR has been involved since 1996. On the Shah Deniz project where we have been working with BP since 2001 we are hopeful for the opportunity to move from FEED to executing the detailed design and construction management for the -- for both the offshore and onshore facilities.

Work in the North Sea also remains active for us with the West of Shetlands project. During the second quarter we received awards totaling about $120 million for a new ethylene cracker in Uzbekistan where we will provide technology, engineering and procurement services. In South America we have completed the delivery of our design for eight semi-submersible hulls for Petrobras and are positioning KBR for other similar work in the region.

Canada continues to do very well. As I outlined earlier we booked approximately $750 million in new business in the quarter related to module fabrication, gas processing and turnarounds. We continue to see strong, diverse opportunities and have a number of large proposals outstanding in Canada. We are also working on three LNG projects in British Columbia today including Kitimat as well as the Shell and Petronas projects.

As we look at the U.S. market, we still see shale gas as a game changer in the U.S. We continue to see a strong ammonia market where we are now tracking 12 different projects. We are also positioning KBR for awards in the ethylene and the chemical value chains as all those facilities use natural gas as a feedstock. We are seeing good opportunities emerging in power with environmental and combined cycle projects that are now beginning to move forward. We are also participating in early stage work at some of the US Gulf Coast LNG developments studying the conversion of LNG regas terminals into liquefaction facilities.

Finally over the next three or four years, we see significant potential in the conversion of natural gas to diesel fuel through gas to liquids projects. On the flip side, we are seeing the shale gas boom is adversely impacting the North American coal industry, and that the North American businesses of Roberts & Schaefer have slowed considerably as a result. These are some of the dynamics in our major markets and how we think they may impact KBR over the next several years. I am very optimistic about what all these markets hold particularly Australia, The Middle East, Canada, and the U.S., and I am optimistic for KBR's continued success with the positions we've established across those diverse markets on these different projects. Now I would like to turn the call over to Sue to discuss KBR's financial performance and outlook in more detail.

Thanks, Bill, and good morning, everyone. Our press release discussed revenue and job income up 2% and 4% year-over-year without LOGCAP. Corporate G&A is also down 10% year-over-year and operating cash flow is up $50 million for the same period. On a sequential basis revenue and job income are up 5% and 9% without LOGCAP. Corporate G&A is down 5% and operating cash improved $55 million.

Let's spend a few minutes walking through some of the more significant financial items in the quarter and I will provide some color on how to think about a number of the key areas that are important takeaways from our call. The first is Corporate General and Administrative Expenses. As we have highlighted previously, disciplined management of our overhead cost is a major focus for KBR. Corporate overhead in the second quarter was $52 million, down $6 million or 10% driven by improvements in a number of areas with the most significant improvement in I.T. and Real Estate.

As we look forward to the second half of 2012 we expect our continued focus on prudent cost control will enable us to drive incremental improvement versus our original guidance range of $240 million to $250 million. We now expect 2012 corporate G&A to come in at approximately $230 million, a reduction of $10 million to $20 million versus our original guidance. The increase in corporate G&A versus the first half run rate will be driven by a ramp up in ERP costs as expected, as well as costs associated with the expansion of our leadership team in Australia related to our newly created group President Australia and Asia position.

The second is our overall effective tax rate which was 14% in the quarter, primarily due to favorable tax rate differentials on foreign earnings, statute expirations on domestic tax matters and a true up of other tax positions. Looking out towards the back half of the year, we see a few potential puts and takes at the tax line item which we believe will land our full year 2012 tax rate at approximately 21%. The third is KBR's balance sheet which at the end of 2012 remains strong -- which at the end of June 2012 remains strong with cash and equivalents of $824 million, down $13 million from the previous quarter.

During the second quarter cash provided from operations was $52 million. Also in Q2 we saw an increase of $57 million in cash from our consolidated JVs. KBR deployed approximately $50 million in 2Q on share repurchases, dividends, pension contributions and CapEx. Since March 31st, 2012, we have repurchased approximately 1.1 million shares for approximately $27 million under our sweeping program and the 10 million share repurchase authorization. This includes 696,000 shares at an average price of $24.29 per share, purchased in Q2 as reported in the public filings as well as an additional 436,000 shares at an average price of $24.12 per share in the month of July. Our 10 million share authorization has approximately 7.3 million shares remaining as of today.

Let me spend a bit more time on cash. We have $824 million on the balance sheet of which $251 million is in joint ventures. The remaining KBR cash is split approximately one-third domestic cash and two-thirds offshore cash. Our domestic cash is utilized for U.S. acquisitions, dividends, share repurchases and capital spending as well as domestic operating needs. We will continue to be diligent in monitoring and optimizing domestic cash in our deployment activities. We have a few areas for improvement in domestic cash. Our 10-Q discusses $99 million in claims with the U.S. government for unfunded work performed at the request of our customer. These claims are in our un-billed receivables. We also have $105 million in fee-obligated funds for Form 1s issued over time.

We will work diligently to resolve the incremental funding in the near term and longer term resolve the Form 1 issues. The Form 1s are included in Accounts Receivable. KBR also has opportunity in un-billed receivable in our other business groups. We have reviewed this area for improvement with our management team and expect to see added focus and improvement in the back half of 2012. Some unapproved change orders will take longer to resolve, however, $43 million of the June 30th balance has been approved subsequent to June 30th.

The final item I wanted to touch on is to provide more visibility into how you might want to think about labor cost absorption for the balance of the year. In Q2 labor cost absorption expense was $6 million. This is a pretty good assumption to use for the next two quarters.

Lastly I would like to briefly review the key elements for our guidance range of $2.60 to $2.80. Bill outlined the way we are thinking about the key markets with respect to KBR and some of the puts and takes to consider, so I will take just a moment to recap some specifics you will need for modeling purposes going forward. G&A expenses of approximately $230 million for the full year 2012, LOGCAP project revenues between $375 million and $450 million for 2012, effective tax rate of approximately 21% for full year 2012. Capital expenditures of approximately $80 million and a share count of approximately 148 million shares for full year 2012. And now I will turn it back over to Bill for his final remarks. Bill?

Thank you, Sue. As we look at the KBR business, we think there is strength in diversity. We have 14 market-facing business units that give KBR a chance to play in a lot of different spaces. While it is very difficult to have each of these businesses performing at peak market trends, it is also good to have several of them performing well at the same time which is where I think we are today. While we do not believe we are firing on all cylinders today, we believe we've spread our bets reasonably well on a geographic basis, on an industry basis, and on a customer basis and I'm very pleased with the opportunity set I see in front of us as a result of this diversification.

While we see some challenges ahead and we continue to have many moving parts in our portfolio, we also see several new and expanded opportunities emerging coupled with the strong execution by the KBR team driving tangible financial results. As a result, we feel confident in updating our guidance range to $2.60 to $2.80 per share. We will now open the call for questions. We ask that you please limit your comments to one question and one follow-up.

(Operator Instructions). We will pause for a moment to give everyone an opportunity to signal. We will take our first question from Andy Kaplowitz with Barclays.

Good morning.

Good morning.

Maybe you could characterize the momentum of the hydrocarbon markets versus last quarter because you talked about sort of a challenging booking environment, but also hydrocarbon is better than expected. We know what the large projects are doing, so how does it look versus last quarter in the context of the global uncertainty we are seeing out there?

Well, when we look at the projects I think we have been focusing on the beginning of the year, those larger ones have definitely moved to the right. I think we have been pretty nimble in moving attention to other parts of the value chain, some of the success we have had in downstream has been good. We continue to see good bidding environments in oil and gas. Downstream we are reloading some of the proposals, but I am optimistic with the continued evolutions of our markets particularly in North America where we could see some growth there.

Technology continues to be strong, and our proposal volume there is up significantly since the end of last year. We are really driving a lot of sales activity there. We have seen -- obviously on the gas-mon business we've talked about a lot of the large prospects and I think they will eventually go forward and I think we are well positioned for them. It is just a matter of when they get there.

The other thing we have looked at too is we spent a lot of money on proposal budgets in the first half that we think is going to trend off a little bit in the second half. Not that we are shying away from submitting proposals, but we have a couple of fairly significant proposals in oil and gas and downstream that we have been working on. Also some of the continuing work in the gas-mon business. So I think that the bidding environment is for the next six months I am certainly more optimistic about what I see in the oil and gas side and downstream in technology and the gas-mon, but overall given the portfolio of opportunities we are looking at both with the geographic diversification as well as the business diversification, I feel that it is pretty positive and time will tell.

That's helpful, Bill. Shifting gears just focusing on gas-mon, obviously you had a strong quarter and margins. Maybe you could break out how much was the change in the cost to complete of the LNG project. Even if you can't, I guess the question is are double-digit margins sustainable as you run off Skikda and Escravos and they are ending relatively soon, correct?

I think the bulk of the work will be finished on those projects by year-end. We will have some tail into 2013, but if you think about the revenues we are bringing from Skikda and Escravos, those were a pretty good portion of the revenues on gas-mon. And as those expire the lower margins that those projects we have had historically will help lift the margins. The other thing we have got to think about, Andy, is we really haven't achieved any cost to cost progress to date on Impex's Ichthys yet.

With that being an equity project, I really think the margins are going to easily be double-digit, and will continue to expand and really the challenge will be how do we deal with Gorgon where we've commented on the margins we are seeing on Gorgon. We are hitting the numbers that we expect, and then the equity contributions from Ichthys that will drive that up. Now, on the other side if we get some of these other projects where we're doing the full EPC, you may bring it down. But I think overall that is good news because the overall margin dollars will be stronger if we are able to do that.

That's helpful. Appreciate it. Thanks, Bill.

We will take our next question from Joe Ritchie at Goldman Sachs.

Good morning, guys, nice quarter.

Thank you, Joe.

Maybe just talking specifically, you gave us a lot of details on the projects and the opportunities, but maybe, Bill, you can force rank the opportunities over the next six months. Do you really think your backlog is going to see opportunity for growth across Canada? Some of the opportunities on the shale side, I guess, the near term opportunities will be on the ammonia plants, and maybe you can talk about the Middle East more specifically.

Boy, That's a tall order. I think I am going to give up rank ordering stuff because obviously if I had 20/20 foresight we might have taken a different approach on some of the big elephants. What I will say, Joe, is as we look at our proposal volumes in Canada, that is continuing to grow. The fact that we booked a lot of work does not mean we have exhausted all the projects we are chasing. In fact, we have seen quarter over quarter growth in the proposals outstanding in Canada. In the Middle East work we have been looking at some of the projects in oil and gas that we are very excited about.

We are teaming with some contractors to bid EPC on scopes of work that allow us to take a little bit bigger share of a project than we previously have taken on some of the engineering only projects. I made some comments also about Shah Deniz where we are hopeful we have the opportunity to move into both the design and construction management of the onshore and offshore facilities which is a little bit broader scope. We have talked in some of the prior announcements about our relationship with Hogue and the fact that we've looked at some projects with them, engineering-wise offshore Israel as well as offshore Australia. And Downstream it is a pursuit that we are looking at the ammonia plants would be first to go, I think, as we look at some of the ethylene plants.

We will see some opportunities for services where some of the players who have technologies that are differentiated from our technologies. We are looking at being a construction partner for them. So we are optimistic about some of the awards and certainly these are large awards because the plants are significant there. From a U.S. standpoint I am thinking downstream more towards ammonia. The U.S. construction business should be very active. You know, we get into the Middle East, oil and gas, and downstream should continue to play there.

That's really helpful, and I guess one follow-up question and maybe touching on Andy's question earlier on margins, you talked earlier about further opportunities on project closeouts. I was wondering if maybe you could help quantify or at least are the opportunities as large in the second half of 2012 versus what you were able to book in the second quarter of this year?

I think there are areas that we believe are still out there. You know, we have commented about some of the difficulties we had in administering the Skikda contract when Sonatrach went through all of its personnel changes, and for a period of time, there really wasn't anybody for us to address on the other side of the table about issues that invariably arise on projects. And it is going to take us some time to work through those. We still see those opportunities in front of us.

I think there will be some tough discussions, but I think we've got good positions as we have looked at the risk allocations from the initial contract, and I think now that the situation is much more stable in terms of staffing as well as the stability of the people at Sonatrach, we will be able to get some objective discussions and work back maybe some of the uncertainties that have risen over the past couple years.

Great. I will get back in queue. Thanks again.

We will take our next question from Steven Fisher with UBS.

Good morning.

Good morning, Steve.

So your guidance suggests an earnings pick-up in the second half. I guess you've got some SG&A and tax headwinds, but you mentioned some proposal cost tailwinds. Can you just tell us which of the fundamental areas within the business you expect to ramp up in the second half versus the first half?

I think the comments we made in the script, Canada we are expecting to be better because of the burn rate on the sales we have achieved this year. We are expecting downstream to pick up in the second half. I made some comments about power as the bookings they made last year are ramping up. I am referring principally to the SWA-EPC project down in Florida.

We also had a couple of one-time events the first half that adversely impacted the North American Government business that we are not expecting to repeat. We have the Tamimi case where we had to take a $28 million charge which we did in the second quarter. We 8-Ked it in early May. We don't expect that to repeat. In fact, we think the logic was flawed and are appealing the judgment there.

We did have a little bit of an offset on that. Not a full offset, but partial on -- it is not a LOGCAP award, but a recognition we can recover overhead related to corporate facilities expenses according to the federal acquisitions regulations on the LOGCAP project. And so we will see a pick-up in that and I think we will continue to see strong execution across the gas-mon business and technology.

That's helpful. And then on the ammonia plants how should we think about the opportunity set for KBR in terms of technology licensing versus EPC? And I guess with corn nearly $8 have you seen increased customer motivation for some of these plants in the last couple of months?

I think the first part of your question, I think their technology guys generally command about a 50% share of market on ammonia licenses which we see no reason that should change. There is nothing that has happened in the market there. Our downstream guys are obviously competing with international players on EP. We are hopeful we will get our share. I will not -- I don't suggest it's going to be 50% share of that market. I would be happy with one or two of the twelve that we are pursuing.

In terms of the changes in the corn dynamics, I think in the past we have talked about tracking eight ammonia plants; now we are tracking twelve. So the market does appear to be responding a bit, but we are trying to be very careful and thoughtful about how we pursue these projects and try to maximize our positions across those projects that we believe are going to go forward based on the merits of the project and spend less time on those that might be a little more speculative.

Great, thank you.

We will take our next question from Jaime Cook with Credit Suisse.

Hi, good morning and congratulations. Two follow-up questions. One, Sue, with regard to the guidance range and what's implied in the back half of the year, can you just speak to what your assumptions are in terms of do we expect -- do new projects have to hit for you to make your numbers, or is it based on what you already have in backlog, and what the expectations are for the projects that have been pushed to the right? And then just one clarification and I think I know the answer, but the $28 million charge that wasn't in your previous guidance I want to confirm that, and then was the $10 million gain in your previous guidance because that speaks to what the earnings trajectory will be going forward? Thanks.

Let me start out with the guidance and the new range. I think, Jamie, the way to think about it is when we look at the first half and particularly the second quarter performance, we saw good performance coming out of a number of the projects in gas-mon and we obviously went through and over-achieved on those. In the full year as we have looked at some of the major projects and in fact a comment we've made during the prepared remarks was that essentially our performance on projects today offset the projects that have moved to the right, so thereby balancing where we are from a guidance standpoint.

I think That's all great news, and again when you think about it, and think back to what Bill had just said earlier, we've got businesses that are going to have a better second half from a revenue and margin standpoint with downstream, with technology, with power and with our Canadian operations, and all of that helps solidify that piece of the puzzle. In terms of the Tamimi case --

But wait, Sue, before we head to that, but I understand the offset there, but there aren't any additional projects you expect to hit that at this point aren't delayed, that are embedded in your second half guidance. I just want to make sure -- you know what I mean -- we don't have additional earnings risk on a project you think is going to move forward that hasn't been pushed to the right yet. You know what I mean?

No, No.

So basically you should be able to hit your numbers assuming the projects that you have in backlog continue at the rate you have projected?

Our new work expectations are normal in the second half.

They are very low. We only have six months left to book them and then burn them.

That's very helpful. I just wanted to be clear. Sorry. Go ahead, Sue.

And then on Tamimi, Tamimi would not have been in our guidance. It was a court ruling that came out in early May as we announced. It certainly wouldn't have been what we expected. As we said, we are appealing the ruling on that. That was not in any of our guidance numbers. In terms of the $10 million, that was part of our incurred cost submissions, and that just like anything else that's in the business there are some things that are positive and some things that are negative. We just happened to call that out for purposes of what we were looking for in the second quarter, but that $10 million relates to incurred cost statements for 2006 to 2009, and we are revising those incurred cost statements.

Thanks, great quarter. Congratulations.

Thank you.

We will take our next question from Scott Levine at JPMorgan.

Hi, good morning, guys.

Good morning, Scott.

So focusing on, Bill, some of the markets it sounds like that are not performing up to your hopes in the North American Government side, and perhaps Minerals as well. Is the issue just your traditional government gridlock with regard to order flow or your expectations that trends will improve there, and maybe some color with regard to what you are seeing on the Minerals side in terms of any slowdown from customers in response to recent commodity volatility?

I think in the North American Government business I wouldn't call it gridlock as usual. I think there is a lot of uncertainty in the Pentagon right now regarding sequestration. Our proposal volumes at North American Government are 50% higher than they were at year-end, outstanding proposals which tells me people aren't acting on stuff. And you can see that in our unbilled. They are slow to react. I think there is a whole lot of creeping paralysis in terms of what does this mean to the broader defense community given sequestration that's on the table. That colors a lot of my comments about the slowness in the North American business.

Within the Minerals we are still very optimistic about our work overseas and the opportunities we see in Australia and Indonesia and India. But I did make my comments around the impact that the shale gas has had on the North American coal industry, and the knock-on effect of the slowness and the coal industry as it affects the North American material handling business for Roberts & Schaefer. So that's what is coloring down the minerals outlook is our performance in the North American market where we just see a much lower order flow. In fact, we have had awards that have been canceled that were disappointing to us. We can't do anything about, but that's just the state of the coal business. And from our perspective in the North American market.

Outside that North American coal issue broadly speaking you are not seeing much of a slowdown throughout the world?

Where we are which is -- we see activity in India. We see Indonesia and Australia. We think it is as stable as it has been previously for us.

Got it. And as my follow-on, you know, you highlighted your last investor day, new office openings in Australia, Angola and Kazakhstan. How are the new offices working and are there other markets maybe that you are targeting that you are not really active today that you may look to get more active in the future?

We did conclude successfully the Saudi office. We have had several hundred thousand hours of awards from Aramco under the GES Plus. That's done us what we've expected. The Luanda office was instrumental in some of the offshore work we have won in Angola. We are opening the Baghdad office, as I mentioned and if you would like an invite to the office opening I could arrange that for you.

We talked about a Rio office, and we are continuing to assess our best entry point there. We've had a gentleman down there for four months now that has been looking at office space and looking at prospects. I think the objectives we set out in our analyst and investor day regarding those -- the three offices in Saudi, Iraq and Rio I think we are on course for getting that execution done in 2012 as expected.

Great, thanks, nice quarter.

Thank you.

We will take our next question from Will Gabrielski with Lazard.

Thank you very much, nice quarter.

Thank you.

Sue, I wanted to follow up on your cash comments and maybe you can talk a little bit more about how much cash you actually view in the U.S. is available for repurchases and dividends every quarter, and then maybe some options you might have, should you pursue M&A or a bigger buyback program or something to that affect, how willing you might be able to use the balance sheet and maybe add some (inaudible)?

I think, you know, as you think about the cash and you think about the piece that is onshore, all of that cash is going to be in various states. So for instance some of it is in our pooled category and is available to go through on the repurchases. I don't think we want to be specific about that because that is an opportunity for us to utilize and deploy our cash efficiently.

I think what is important as you think about that, one-third of the cash outside of the JVs being in the U.S. is, I talked about what is in un-billed receivables. That is primarily U.S. cash, and that is cash that we want to collect. That is an important element of how we run the business, and that has to be first and foremost on our mind.

Secondly as we think about what is different about cash in the future, we do have cash that we can take out of some of our foreign operations and in fact, in the 10-Q we are going to routinely pay tax and bring back some of our Australia earnings as we move forward just because that is going to get to be a big part of our earnings.

And then in terms of what else do you do in terms of acquisitions, if it is a U.S. acquisition you obviously need U.S. cash and certainly we'd look at all of the different elements for that including debt. And if it is foreign we will use some of the foreign cash. I think all of the answers are pretty logical as you look at how you would manage that cash in the future.

That's helpful. Then my follow-up Bill, maybe you could walk through Gorgon a little bit. There has been some news about cost increases. I know you are pretty well insulated in your contract, but I am just wondering if there has been any major change in strategy around that project and timing on Gorgon 4 or not and what you are doing maybe to help the project move along at this point? Thank you very much.

Yes Will, on Gorgon it is -- obvious it is a very complicated project, particularly from a logistics standpoint. First of all as we look at the project, we are working towards getting train one up and producing gas in 2014 as the original schedule has. And we have got our plans in place to drive some better productivity in the field to help us achieve that.

We have seen some increased scope at KBR. I think the -- some of the logistics that we had initially planned and the assumptions related to it were probably a little bit understated. We have seen some additional work hours come to the project.

We also are seeing a higher percentage of KBR people on the project which is also given us a pick up in the IGP earnings in our profit and overhead recoveries that were better than we started the year with. Certainly some of the aspects and when you look at a percent complete, some things are moving out in time. We still think the volume that we have at Gorgon is going to continue at our present levels for a while. But I think it is still working forward.

We have a great working relationship with our integrated project management team with Chevron. We are addressing all the various fronts of work. We have got some of the first modules that have been set on the island. We're largely out of the ground from a civil structural standpoint. As we continue to knock those things off we will address other aspects such as mechanical and the other elements related to the ultimate start up of that project.

Thank you very much.

We will take our next question from Tahira Afzal with KeyBanc.

Good morning, and many congratulations on the good quarter.

Thank you.

You know, my first question is really in regards to your underlying business outside of these very large projects. It seems you are pretty confident on really how those markets are shaping up, and you alluded to the 14 end markets in essence. Can you sort of reflect a bit qualitatively on as we look outside of 2012 and if some of the larger opportunities that you see out there are sort of pushed more out on the right, how would the growth outlook look for KBR outside of those large projects?

Well we've talked about some of the additional opportunities we are looking at in oil and gas, both around my comments on Shah Deniz and some of the work in the Middle East on projects with fabricators as well as the Hogue work. So I think there's a lot of opportunities we are seeing there for us. Downstream we've talked about the opportunities in the U.S. around shale gas but also the Middle East and the recurrent work we are seeing there. Technology has been a good business. It has been growing 20% plus a year for us for the last couple of years. We are comfortable we are going to hit that mark again in 2012.

As we look at our government businesses, we think they are in a decline for obvious reasons as the war efforts slow down. As a result we are probably not going to report our guidance for LOGCAP next year because I think it has gotten to a point where it is immaterial. We are optimistic from where we sit today about our P&I business, Power and Industrial. We had a lot of good bookings last year that are working their way into the P&L over the next couple of years.

We've got a series of bids that we're working on. We feel good about the bids. I do think that P&I can be a much different organization size-wise than it is today and continues to grow just based on the success they have enjoyed over the last 18 months.

Minerals, we are starting from a small platform and so any growth we'll have in Minerals will be large in percentage terms. And I do think the skill sets that KBR brings in terms of complex logistics, remote location, harsh environment execution do play well in the Minerals market, and I think we will see those projects begin coming to KBR as we continue to work with our customers principally today in Australia and Indonesia. Infrastructure is a pretty stable market for us in Australia. We do see opportunities to expand that in the Middle East. We have had some successes already in the Middle East with the Doha Expressway project, with all the work we are doing. We expect as they continue to move towards the World Cup in 2022 you may see expansions in that work. U.S. construction is, I think, poised to really pick up with the increased spending we are going to see in the U.S.

Canada, I have said a lot about Canada, and I am pleased with where we are. And we talked about the building group being one where we think we have seen the bottom, and we are starting to book work, and that business will start growing again. Industrial services is performing stably, and we hope they will be able to grow their business, but probably not to the same degree of growth that we would we expect to see in Canada construction, P&I and Minerals, for example. So that's qualitatively a walk around the world for KBR.

That is very helpful. Thanks a lot. And just as a brief follow-up, you know some of your peers an even yourselves, at your analyst day talked a bit about Africa, and I know right now the big opportunities you are looking at there are more LNG-oriented, in a sense. But if you really look outside of China and India, how excited are you as of right now in Africa being a longer term opportunity, maybe a couple of years, three years plus out for you?

If you look back over the last couple of years in Africa, we don't think there has been a lot of work going forward. I think we will see work go forward, obviously the offshore Mozambique work is the most visible but we will see continued work releases in Angola for the offshore. We are still optimistic on the refinery. We think Sonatrach now that they have gotten a lot of their internal issues behind them is going to probably resume doing projects in the upstream side.

We do see things working. I commented on some increased activity we are seeing in what is a relatively smaller office for KBR in South Africa. It does appear there is some stuff going on, and we are happy to see Africa start showing signs of growth again. It is hard to call where Nigeria will end up or where that will clear up. But I think it is still a lot of economic opportunity in Nigeria, and eventually it will be seized upon by the government to create the wealth for their population that they are seeking to do.

All right, thank you, Bill and Sue.

Thanks.

We will take our next question from Brian Konigsberg with Vertical Research.

Good morning.

Good morning.

My first question is on oil and gas. You talked about a lot of prospect there coming up. You had talked about becoming a bigger player in that business. I was just curious, you talked about partnering. Do you see that strategy as being one that is going to really kind of satisfy your ambitions, or do you anticipate you are going to have to do something more? Maybe increase M&A, purchase some assets. Maybe just give a little bit of color on that.

Well, I think we are looking at one step at a time of trying to grow the business. I commented previously that it had been primarily a top sides engineering design business with some semi-submersible designs out of GVA. We do see good opportunities for us to collect additional economic rent doing EPC work through higher margins because of the risk we undertake, but also broader scopes of supply in terms of some procurement management as well as construction management. I think the efforts with Hogue do get us a play in some of the offshore LNG, floating LNG concepts.

So we are really looking at taking the strengths of KBR and leveraging them into a broader array of opportunities that are typically larger and provide better opportunities for us. If we can get all that accomplished I think I will be very pleased in the next three or four years. In terms of buying stuff, we always are on the look to see what we can do to create value for our shareholders but really I think a lot of the opportunities we see today for us are on the organic side, and we are applying our resources as we described in the investor and analyst day last year towards maximizing our platform on projects largely through an organic growth strategy.

Got you. And secondly on power, you said building grassroot gas plants and also environmental retrofits as being a big opportunity and you're seeing a lot of bidding and quoting activity. One of the large utilities yesterday talked about scaling back their CapEx largely due to I guess lower requirements that they see in regards to retrofits for environmental reasons. I am just curious, have you seen a change in the opportunity on that market specifically? Maybe just a little color on what you are seeing there.

To answer your question, no, we haven't seen any real changes in our prospect list or the opportunity set. I know that when utilities announce a lot of their environmental needs under the MACT and some of the other rules that were talked about by EPA, you had TVA talking about $20 billion of expenditure. I think AEP, Duke, Southern all had very large amounts of dollars. And even if some of the utilities are starting to scale back a little bit, it is still starting from a very, very large number when you look at the North American fleet. And we also see combined cycle plants as being a pretty good opportunity for us.

We look at just on the -- we are kind of working on three proposals right now in power and two of them are environmental and one is a combined cycle. So I think that market is still strong. I think there is a lot of work to be done. I think people still are going to be looking for ways not just the utilities, but I think in terms of a broader group to continue to find ways to keep coal relevant in the U.S. in an environmentally acceptable fashion.

Thank you very much.

We will take our next question from George O'Leary with Tudor, Pickering.

Good morning, guys.

Hey, George.

Just a quick LNG question. Given KBR's global footprint within the LNG sub-sector could you talk about which LNG markets from a geographic standpoint you guys feel are more attractive than others over the next say twelve to eighteen months, and maybe bucket those between the U.S. versus Canada and Australia and then some of the African projects that may move forward?

The next twelve to eighteen months I would say Australia and the U.S. would be my top picks just given the maturity of the developments. We have talked for some time about Browse and Pluto. There is also Arrow, Gorgon 4. In Canada we talked about the three projects we're involved in in British Columbia. I think the U.S. is a little bit further behind.

First I believe all the gas in Canada is considered as being stranded and it is not going to find its historical market in the U.S. because of what we are turning over in the U.S. markets for shale. And then I still think -- you will still have some discussion between the government and the tension between the American Manufacturing Association that will want to keep all the gas for the manufacturers here versus the constituencies that will want to export it.

I think that debate is a little different here than what you see in Canada which has always been an exporter of energy. Those are the top. U.S. and Canada are the top two. I would say much longer term U.S. -- excuse me, Australia and Canada are the top tier, and the second tier would be U.S. and East Africa.

That's very helpful. Thank you. And then you mentioned shale, just kind of following on with that and talking about a robust downstream market, are there any incremental opportunity within the refining space given what we are seeing from light shale oil production in places like the Bakken and maybe the Eagle Ford? You are seeing more of that light oil, that condensate come on-line. Is there any opportunity there with them maybe potentially doing some refinery work?

I think there might be, but that is more of a theoretical comment based on the opportunity, and anything we are looking at today, George, is not of a magnitude that is on our screen as being unique and high potential.

So no proposal out there yet?

We may have some, but certainly not that I'm aware of, and that would be of a magnitude worth talking about in this forum.

Okay, Thanks very much, Bill.

And due to time constraints that was our last question for today. I would like to turn the conference back over to Bill for any concluding remarks.

I would like to thank all of you for the attention to our call today. We appreciate the questions and interest in KBR. If you have further questions, I think Zac and Rob will have time today to help address any questions we couldn't get to on the hour that we were allotted. But thank you very much for joining us, and we look forward to our call next quarter. Thank you.

And that does conclude today's conference. Again, thank you for your participation today.