KBR Inc (KBR) 2012 Q3 法說會逐字稿

Good day and welcome to the KBR third quarter 2012 earnings conference call hosted by KBR. This call is being recorded. As a reminder your lines will be in a listen only mode for the duration of the call. There will be a question and answer session immediately following prepared remarks. You'll receive instructions at that time. For opening remarks and introductions, I would like to turn the call over to Mr. Zac NAGL Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you. Good morning and welcome to KBR's third 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 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. During today's call, Bill will provide an overview of KBR's third quarter operating results, highlighting a number of key areas. He will then take you through several our strategic initiatives as well as several major prospects KBR is pursuing. Sue will then provide an overview of the key financial takeaways for today's call. Lastly before we open the call for Q&A, Bill is going to provide brief closing comments. After our prepared remarks, we will open the floor for questions.

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting 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 third quarter press release issued last night, KBR's form 10Q for the period ended September 30, 2012, and KBR's current reports on form 10K. You can find all these documents at kbr.com. Now I'd like to turn the call over to Bill. Bill.

Thanks, Zac. And good morning everyone. First I want to talk about the $178 million non-cash goodwill impairment that KBR took in the third quarter. As we've stated over the past few quarters, KBR's well positioned for many opportunities arising from the development of North American shale gas resources. We've talked about both engineering and construction opportunities for ammonia, ethylene power, LNG and gas to liquids projects in North America. We've also discussed the adverse impact to the North American coal industry and by extension the solid fuel material handling markets of Roberts & Schaefer related to the present and expected long-term low natural gas prices arising from shale gas resource development. Over the past few quarters, the Roberts & Schaefer business line has seen the cancellation of awarded projects as well as the cancellation of potential new projects in North America. These changed market conditions have caused KBR to revise our North American revenue forecast at Roberts & Schaefer. This reassessment has led KBR to take a non-cash goodwill impairment charge at our minerals business unit during the third quarter in the amount of $178 million. KBR remains enthusiastic and committed to the global minerals market and firmly believes that the people and legacy track record of performance will continue to drive KBR's continued expansion in the global minerals market.

Next, I would also like to discuss a few of the headwinds we encountered during the quarter with both Roberts & Schaefer and in our US construction business. During the third quarter, KBR took an $8 million charge related to our legacy Roberts & Schaefer project, the same project we took charges against in the first quarter. We are clearly disappointed we did not make the progress we had expected coming out of the Q1 charges to eliminate additional charges. Charges in the quarter included an additional $5.1 million for scheduled liquidated damages and $2.7 million for additional cost to complete the project. Presently, KBR has fully funded all LDs for the project, which is now forecast to be completed in March 2013.

At US construction, provisions on two projects were also taken during the quarter. The first charge taken was for a paper project in Louisiana where KBR took a $10 million provision during the third quarter. The project, which is scheduled for completion by year end, was adversely impacted by both Hurricane Isaac as well as the discovery of lead contamination at the site which adversely impacted our labor costs and productivity on the project. We are in discussions with the customer regarding settlement of these increased costs to complete the project.

The second charge taken was for a power project in Georgia at a site where KBR has worked for some time. During the quarter an $11 million provision was taken related to increased wage and per diem cost and lower productivities related to higher than historic levels of turnover on the project. We believe these provisions now reflect the labor reality facing this project over its remaining life. The project is presently 60% complete and scheduled for completion during the fourth quarter of 2013.

Now with this discussion behind us, I would like to talk about several positive events which transpired during the quarter. Overall, KBR was able to deliver a strong third quarter performance despite the headwinds I discussed. Excluding goodwill charges, KBR delivered fully diluted earnings of $0.65 per share. KBR continued to see great performance on a number of our LNG projects. During the quarter, we saw continued strong project execution, achievement of several project incentives, success in closing out a few legacy issues on an LNG project, and our first solid contributions from the Ichthys LNG project. This resulted in a very strong income growth and margin expansion in our gas monetization business unit, and as Sue will discuss later in her prepared remarks, some of this increased margin is ultimately backed out in the non-controlling interest line on the income statement.

Revenue excluding log cap was 2% year over year reflecting the continued growth in our other businesses. Consolidated job income was up 13% year over year and job income margins reached 16% with particular strength in gas monetization and oil and gas. Backlog remains strong and we booked approximately $1.6 billion in new work and net work scope adjustments. Our book to bill ratio for the quarter was approximately 80%. Downstream had a particularly strong bookings quarter with backlog up 18% primarily related to new work on a number of projects in Saudi Arabia. Coming off a strong second quarter of bookings, Canada continues to have an excess of $1 billion in proposals outstanding. Building group continued to see renewed strength in their light manufacturing and residential markets, driving an incremental $151 million in new work in the quarter, on top of the $150 million of new work added in Q2.

Now I would like to comment on several of our strategic initiatives as well as several major prospects KBR is pursuing. We are continuing to build a strong pipeline of pre-FEEDS and FEEDS, where KBR presently has 19 ongoing across the hydrocarbons business group, approximately 50% of which are in our gas monetization business unit. An example of one of the newer pre-FEEDs is the award for the Statoil Tanzania LNG project we announced earlier this month. We believe these pre-FEEDS and FEEDS position KBR well for a diversified set of future growth opportunities. For the Kitimat LNG project we continue to be engaged with the customer on additional FEED analysis and on the open book EPC tendering of the project. We were advised by the customer that FID is now expected in the second half of 2013.

For the Browse LNG project our EPC bid was submitted last quarter. The customers publicly stated they will make their ultimate decision on the project by the second quarter of 2013. For the Gorgon LNG fourth train project, extended pre-FEED activities continue and we expect a transition into FEED by mid 2013. For the Mozambique LNG project the FEED bids are in and we anticipate awards to be announced soon. For the Pluto LNG project KBR remains engaged in discussions with the customer on the expansion project. KBR is ready once the customer decides to move forward with the project.

Regarding our other projects and gas monetization, at Escravos construction should be wrapping up this year and we expect to start up in commission the project early next year. At Skikda we are ready to put first gas in the LNG plant and expect to commission the plant during the early part of 2013. At Gorgon on we continue to progress well with our subcontractors and we expect to bring the first train online in 2014. Turning to the Ichthys project, we are now seeing the project beginning to impact the P&L as the project gradually ramps up. We expect 2013 to be stronger and 2014 and 2015 to reach peak earnings for the project. In her comments, Sue will discuss our further thoughts on how the street should think about P&L modeling for the project as well as discuss the net open fixed-price positions in our Ichthys LNG related backlog.

At our oil and gas business unit, our strategy has been to expand KBR share of wallet in our projects. To drive this greater share of wallet, we are performing a FEED for the Shah Deniz project in the Caspian where we expect to do EPCM for both the onshore and offshore portions of this project when the project achieves FID in early 2013. We are also pursuing with a partner a few integrated project delivery opportunities in the Persian Gulf, namely the ZADCO and [SAP] projects. Bids have been submitted on the ZADCO project and we expect to submit the SAP bid shortly. Oil and gas is also involved in three floating LNG developments, two with Hod and one with Suez on the Bonaparte project.

At downstream we continue to be very active with PMC and CM work on the Yanbu refinery project, extensive PMC work on the Sadara project, and PMC work on the [Jazan] refinery project fee. The Saudi-based KBR AMCDE joint venture allows KBR to further expand our footprint in Saudi Arabia and to possibly see project execution opportunities in $300 million to $1 billion range. Downstream also continues to track several ammonia EPC projects in North America. KBR is involved in one FEED for US ammonia plant which we hope will move forward with EPC in the first half of 2013 as well as pursuing three other FEEDs in the US, which are expected to be awarded by the end of this year. Additionally we are bidding an EPC ammonia project also with an anticipated award in the first half of 2013.

At technology, we have doubled the size of our technology design offices in both India and China. Technology is also seeing a lot of license activity for ammonia projects in North America and we announced this quarter an award for the Iowa fertilizer project, the first ammonia plant to be built in the US in 25 years. At services, as I mentioned earlier, we continue to see a great rebound in Canada both in terms of our awards to date as well as with our prospects with over $1 billion in proposals outstanding. At the building group we continue to see strengthening in our light manufacturing and residential markets. In the IGP business we think NAGL revenues have bottomed out and we expect our other non- cap government business growth to offset any potential for further declines in the log cap related work.

Further my comments from last quarter, I am extremely pleased by the continued success KBR has achieved in resolving several of the high-profile lawsuits surrounding our military support businesses. In the 2013 to 2014 time frame, we expect IGDSS to shrink a bit related to troop wind downs in Afghanistan and the completion of construction activities for the Allenby and Connaught project. However we are also excited with the number of new out opportunities being covered in IGDSS in Libya, in public-private partnerships in the UK and Australia, for camp support in the minerals market and the outsourcing opportunities in both the Ministry of Defense and with the local police forces in the UK. At our infrastructure business unit we continue to see stable but slowly growing markets in Australia and in the US. We are most excited with the suite of opportunities we see in the Middle East for roads, railroads, bridges, man camps, and airports.

At our power business unit we currently have several multi-hundred-million dollar bids outstanding which we hope will build on a very successful sales year we had in 2011. We are continuing to position this business as an EPC contractor for pollution control facilities and new combined cycle projects, and believe KBR has a favorable value proposition in this space. Minerals has been a bit of a challenge at a few of our legacy projects and the challenges to the Roberts & Schaefer business related to North America shale gas developments. We do, however, believe our minerals business unit presents KBR with an opportunity to deliver high revenue growth over the coming years. We continue to see many solid long-term opportunities, and we remain confident in our ability to compete and win in this marketplace. We are presently executing a number of early studies that position KBR well for the pre-feasibility and feasibility studies and ultimately EPCN projects that will enable us to develop a solid pipeline for this business over the coming years.

Now I'd like to turn the call over to Sue to discuss KBR's financial performance and outlook in more detail. Sue.

Thanks, Bill. And good morning everyone. We covered the highlights of our businesses in the press release and I won't repeat those items. I would, however, like to summarize my view of the P&L and balance sheet.

First on segments. Our hydrocarbon segment had strong performance in all units. Gas monetization had good performance on Gorgon, Skikda, Ichthys, Escravos, and starting the new Tanzania LNG FEED. Margins were a strong 18.2%. Downstream had bookings and adjustments of $265 million for the quarter with awards on Yanbu, Jazan, Sasol, and new work releases on Sadara. The IGP segment performed well and as expected with the exception of the goodwill and project charges in minerals.

The goodwill impairment charge is primarily driven by deterioration in economic conditions in the mineral markets globally, but primarily North America, and less than expected actual and projected performance for the minerals reporting unit. The combination of these trigger factors caused the devaluation of goodwill for minerals in Q3. The charge has no effect on KBR's business operations, cash balances, or operating cash flows. We are evaluating overhead reductions and an office closure in Europe for our minerals business unit. Q4 charges associated with these activities are expected to be less than $5 million.

Services performance is somewhat overshadowed by the US construction charges. Canada and industrial services had good sequential revenue growth and margin expansion. Canada grew 22% in revenue and 54% in job income and industrial services grew 7% in revenue and 30% in job income from Q2 of 2012. KBR under absorbed it labor cost in our centralized engineering pool by $8 million as we balance the talent needs for projects we see coming and the current work on hand. G&A was $56 million and on track with our expectations for each of the overhead departments including the ERP project.

Non-controlling interest of $21 million is higher than normal for Q3 due to progress on Gorgon and our earning of two incentive milestones also on Gorgon. The incentive milestones added $10 million to non-controlling interest in Q3. Taxes on the P&L were at our normalized operating effective tax rate of 28%. KBR had a good operating quarter with $0.65 of earnings despite $29 million of headwind on project charges, and we've kept our guidance unchanged at $2.60 to $2.80 per diluted share excluding the goodwill charge.

Turning to KBR's balance sheet, which at the end of September 2012 remains strong with cash and equivalents of $846 million, up $22 million from the previous quarter. During quarter, cash provided from operations was $44 million and KBR deployed approximately $46 million on share repurchases, dividends, pension contributions, and capital expenditures. Let me spend a bit more time on cash. We have $846 million on the balance sheet of which $201 million is in joint ventures. The remaining KBR cash is split approximately 40% domestic cash and 60% offshore cash. Our domestic cash is utilized for US acquisitions, dividends, share repurchases, and capital spending.

Last quarter I talked about a few areas for improvement in working capital. Working capital defined as total accounts receivable and accounts payable has increased $271 million year-to-date as of September 30, 2012, with the largest increases in claims and unapproved change orders. In regards to our US government work our accounts receivable includes $124 million in form one withholds from the US government and $82 million of claims in un-billed receivables related to cause for work KBR performed at the customer's request in either absence or in excess of funding on task orders. Also our un-billed receivables include claims of $106 million for the reimbursable portion of an EPC contract which we are pursuing and anticipate collecting. We are working diligently to resolve those issues.

In addition, we are working with all of our business units to collect past due receivables and bill our customers for work incurred and not un-billed due to timing. We are making progress and expect to see results in our fourth quarter operating cash flow. KBR finished Q3 2012 with $14.8 billion of revenue backlog an increase of 27% of Q3 of 2011. Job income in backlog also increased 27%.

As Bill indicated earlier, another important item I wanted to discuss this quarter is how you might want to think about modeling revenue and job income for the Ichthys project award KBR received in Q1 of this year. This is a fairly complicated contract to model and so we are going to try to simplify things a bit and also protect confidentiality for our partners and customer. In early 2012 KBR booked approximately $5.6 billion into revenue backlog Ichthys. In terms of modeling approximately 30% of the $5.6 billion is expected to flow through KBR's P&L as revenue earned over the five-year life of the contract, which includes KBR services, revenue as incurred and our portion of JV profit which is forecast as fairly normal project bell shaped curve distribution. The remaining portion of revenue backlog will be adjusted out of backlog without hitting KBR's P&L.

Relative to income from Ichthys, recall that the project was bid on an open book tendering process so it's reasonable to assume the overall profitability associated with a blended average of all the various types of services provided will be at typical competitive LNG project margins. These services include everything from procurement to construction management to module fabrication and delivery and so on. Simplistically speaking if you take the $5.6 billion KBR booked into backlog and multiply that times competitive LNG margins, of mid- to high single digits, you should be able to get in the ballpark with the total income KBR should see over the life of the project. Similar to revenue, the income profile should roughly approximate a normal project bell curve. Again the Ichthys contract structure is very complex and as with any project as we provide some time we may see changes related to project scope, project execution and other things that may make the project revenue and profitability different from this discussion.

Regarding the Ichthys LNG backlog in the increase in the fixed-price component of our overall backlog in Q1 we added approximately $3.3 billion of fixed-price work to our backlog related to the Ichthys LNG backlog. Of this amount, approximately $2.9 million or 89% of the fixed-price back log addition was back-to-back work or represented KBR workscope where we had funded contingencies and provisions to limit our ultimate fixed price exposure. So the net open fixed position exposure in KBR's Q1 bookings related to the Ichthys LNG project is approximately $350 million. Now I'll turn it back to Bill for his final remarks. Bill.

Thank you, Sue. KBR continues to benefit from the diversity offered by our 14 market facing business units. We believe we've spread our bets thoughtfully on a geographic market and customer basis. I remain very pleased with the opportunity set of projects I see in front of KBR as a result of this diversification. Further, I feel that new project awards in 2013 will be much improved over 2012. As a result, we are leaving our guidance range unchanged at $2.60 to $2.80 per share excluding the third quarter goodwill impairment charges. In closing, absent our headwinds this was really strong quarter for KBR.

Now we will open the call for questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

Thank you. (Operator Instructions ). We will pause for a moment to allow everyone to signal for questions. (Operator Instructions ). Scott Levine, JPMorgan.

Hi, good morning guys.

Good morning Scott.

Bill, you indicated that you do expect orders to be up in 2013 versus what you have seen and 2012. You know, obviously there's a lot of large projects, and generally they have moved to the right. I was wondering if your comments are really excluding the timing on those, and whether you are seeing just general momentum in the business and excepting for these larger projects, whether you're expectation on some of the smaller jobs in general that customers across the business are developing more confidence, or additional color on your degree of confidence that booking should accelerate as we move into next year.

Okay. I think you can look at some the segments that we have talked about. The oil and gas businesses, obviously, some projects that have a great deal of momentum, and as we look at Shadanese, we think that we are in the FEED and that's got a pretty identified FID for us early next year. The bids at Zadco and Saarb are marching according to a schedule that we don't see much slippage going on in those opportunities. We are seeing enough opportunities surrounding the EPC and the Ammonia business next year and then comments people are making about making commitments in the first part of 2013 that lead us to believe that some of those projects will go forward. Yet technology remains strong.

The LNG business, obviously, a lot of big things going on there, and we do think that some of the delays that we have seen we will see action in 2013. And certainly, we have been delayed on Kitimat and some of the Australian developments that we do think we will move forward. Again, time will be the ultimate arbiter of when they go forward.

As we look at some of the other areas, we do see a lot of stuff going on in Canada, both from the LNG standpoint as well as up in the oil sands and that seems to be moving with a fairly solid pace, and again, we are not sure, necessarily, on the LNG side, which one would make it there first, but we are certainly tried to play our best as widely as possible and be there for whichever project does emerge, and similarly we are trying to take some positions in the US gulf coast.

We are also seeing discussions continue with some of our customers on gas to liquids projects. We do see some very good indications that we could see FEED activity in 2013, which is positive. We do think that with respect to our North American Government business there's been a real hesitancy to do much of anything in the face of sequestration, and we think that's held back a lot of the projects that would go forward. We do think that once you get through the election and the unknowns become knowns, whichever direction they go, I think you'll see some resumption that will result in projects going forward in a more traditional sense, and we really haven't seen that award cycle this year because of the uncertainty in the Pentagon facing sequestration.

We see a pretty robust project list in the Middle East in infrastructure, as we talked about. Airports, rails, roads, bridges, and other man camps. That looks pretty good we do think those projects will move forward. If the Minerals business continues to show some activity for us. Now, granted, globally I think we all recognize things have slowed down a little bit, but from where we sit with our relatively de minimus share of the minerals market, the projects where we're performing and have some early studies on, if a part of them go forward that should be some pretty good revenue growth for our Minerals business and I do believe we will see the inventory of power projects begin to go forward with some announcements coming this year still.

So overall I do see a slightly more optimistic view. I'm a little bit more cautious because I was probably -- we probably a more bullish view on some the larger projects a year ago, which didn't go forward. But we are still tracking them. They are continuing to do site preparation activities in Angola for the Lobito refinery, but until they get a lot of their partnership issues resolved, we are not going to put too much emphasis on how that fits into our downstream business. But overall, I do think as we get through the US election and just the backlog of projects that's out there, I do think it will be a better order cycle in '13 than we did see in '12.

Got it. And thanks for that. My follow-up, I guess, on the Minerals business. It sounds like most of the issues you're highlighting here are in the US. I was wondering if you could comment just on the pace of activity and customer appetite outside the US, and maybe discuss some of the factors that give you the confidence to say that you can compete and win in that market.

I think we are establishing ourselves as a player. We've had one customer remark to us directly at the recent minerals convention out in Las Vegas, we're viewed as one of their Tier One contractors, which is good.

The North American market of Roberts & Schaefer was largely solid fiber material handling projects around coal-fired projects, which have not gone forward, and we all know what's happened in the US, and certainly our forecast for revenues in North America have gone down. We do have a number of studies that we're working on in Australia, Indonesia and India that we think position us with opportunities to follow through on pre-FEEDs, FEEDs, and ultimately the EPCM projects that, again, from the present form of our Minerals business can represent them pretty significant growth for us.

Great. Thanks, Bill.

Andy Kaplowitz, Barclays Capital.

Good morning guys.

Hey, Andy.

Actually, could I ask a question to Sue, and maybe Bill you can answer too, but just in gas monetization, can you guys disclose the amount of the Skikda reversal of the contingencies that you had there, just to help us sort of with modeling?

Well I think what I would do, Andy, as you think about that is, you know, the project has gone along over the last several years, and we've obviously talked about difficulties that we have had, communicating with our customer because of their political situation and so on. So as you look at 2012 and in particular change orders that we're pursuing, some of those are current year, and a good portion of what we booked in the third quarter is related to 2012, and you know the way I kind of think about the amounts overall, is we are the upside sort of offset the downsides on the other project charges in other businesses.

Okay. That's helpful. Bill, so obviously there's a lot going on with the Company, a lot of positive things. You know and that sort of offsets the large projects, you know, as you answered Scott's question. Maybe if I could ask it differently, as you look into the next year, how confident are you in the earnings growth of the Company given that now it seems like the average large project its, sort of, mid-next year or so for it to go forward. Is there enough in all the other businesses that you still, do you feel pretty confident in earnings growth? How do you look at that?

Well I think we will give guidance -- formal guidance -- for next year after we go through our budget discussions next week and then review this with our Board. I think we've got a great run rate. I will just comment on existing projects. Obviously Askrovos is going to wind down, but that has been much of a contributor for us since we converted it several years ago.

Skikda, we are still working through items with you know the customer that remained to be addressed. We are confident that we've got -- that we are performing well, that we're viewed as performing well and I do believe that we still have some provisions. For example, the liquidated damages we took that we've got a good shot at clawing back with good and valid reasons and then we will address that with the customer in due time.

We still see Gorgon going strong. That project for '13 will be big in construction on that and even in just 2014, at the end of 2014 we'll bring the first train up and we still have two more after that. Icthus is just now making, in our world, some impacts on the P&L that are worth talking about. We're hitting the lift off point on project percent completed. Engineering we're getting our teams mobilized now into the fabrication yards, we're setting up our initial construction management organization, the latter two of which will start giving us services income.

So yes, I feel pretty good about our momentum an existing projects and I'd like to limit my comments to we don't see a big falloff in terms of our activity on the big projects in the portfolio. So, as things continue to move forward next year and we sign up additional work, we think we can get still some work signed up this fourth quarter, that it will be an interesting discussion we will have with our teams next week as we review their budgets.

Jaime Cook, Credit Suisse

Hi. This is actually Andrew Buscaglia on behalf of Jamie Cook. Congratulations for good quarter, guys.

Thank you, Andrew.

If I just wanted to actually follow-up in terms of your capital allocation strategy. If you can comment in particular on M&A, on just any update on your thoughts there.

Andrew, I think as we look at cash and deployment of that cash, we continue to look at the same buckets that we've looked at, which, you know, is return to shareholders through share repurchases and dividends, investment in organic growth, and our ERP project, and M&A certainly still has a place in all of that. So, I don't think that has changed any and to be honest as we look at all of the different markets and places for that, I think we will continue to be very balanced.

Okay. And then actually just a follow-up on -- you guys talked about unbilled receivables in one of your segments. Is there anything to read into there, or is that just kind of typical of what you're seeing. If you could just talk a little bit more about that.

I think that as we think about receivables and unbilled receivables, as I said we think that a good deal of the increases are coming from claims and unapproved change orders. All of those are fully vetted by our own internal teams as we go through this process, and we believe that they are going to be collected, and what we are signaling there is over time we are going to get those done, and I just wanted to provide a little bit of color on why there was growth there, and you know as we see other projects go forward, I personally believe that it's very important as a business to have a lot of discipline around getting your invoices out, getting them correct, and collecting those receivables, and so that's really the nature of the commentary.

If I could add to that. We do have a very rigorous process involved, both internal assessment as well as supported by third-party outsiders. So, we feel pretty good about what we booked. And then the one element that Sue talked about in her comments, we do have $82 million in unbilled receivables with the government where we have performed work at their request that they have not yet funded a task order, or they've asked us to continue working as we've exceeded the cost of the amount that has been funded on a task order. So I think those are some of the uncertainties we've seen arising from sequestration and we are working very hard to help them see some of the shortcomings in their funding of the task orders.

All right. That's helpful. Thanks guys.

George O'Leary, Tudor Pickering.

Good morning.

Hey, George.

Just looking at gas monetization margins and the big uptick quarter over quarter, just wondering if you could provide a little bit of incremental color between the break down from the roll on of Icthus and some of the recouped costs, or project closeouts that boosted that margin a little bit, and how can we think about that trajectory of those margins going forward? I know you touched on a little bit and I need just a little more color on the breakdown there.

I think the two things that I would ask you to think about are the impact of Icthus, which we had previously said comes in as an equity project. So, again we are not ramping up big on our services. So, the income is percent complete times the profit pool, and that comes in at $1 of revenue and $1 of earnings. So, that's 100% margin that does help lift up the margins.

The other one as Sue talked about is Gorgon. You've got to look at the gas-mon margins and the vast majority of our non-controlling interest at the bottom of the P&L is backing out 70% of those positive P&L impacts. So DSOs went up way high, and we always try to be very clear referencing big gas-mon margins by saying also look at the NCI line, and that will help bring it down a little bit. But it does present perhaps a more optimistic view when one only looks at the gas-mon line without considering the minority interest back-out on the Gorgon project.

Okay. That's very helpful. Thank you. And then a follow-up. Looking at Canadian LNG versus US LNG projects, given the remoteness and the large infrastructure costs which potentially translate into incremental buildout time on those projects, is there any -- what would you say your thoughts are around timing of the US LNG versus Canadian LNG, both from an FID perspective, and assuming there's a longer build-out time for Canadian LNG. Do you actually expect first gas to come from some of these US LNG projects?

I would say if I could really simplify it is a horserace between Canada and the US. One horse says can you get your pipeline infrastructure permitted on the native lands up in British Columbia? And on the other horse being can you get your export permits from the FERC and the Department of Energy, given some of the statements made by the American Manufacturers Association regarding -- don't export the gas, let us export value-added products with gas as a feed-stock. I think those are the two items that we are watching and they're going to be the critical path drivers for the generic Canadian projects and the generic US project moving forward.

Thanks very much, guys.

Tahira Afzal, KeyBanc.

Hi, thank you for taking my questions. First question is in regards to some of those big cracker prospects in the US. From a technology standpoint it seems that they might not be a good fit for you, but would love to get a sense of where the EPC side, where you're positioning is, and if you could provide any color on the timing if you are positioned on those.

Well, the ethylene projects that we talked about, I think the ethylene technology that KBR has and markets, historically has performed better on NAFTA as a feed-stock as compared to methane. And so our technology does not line up as well in the US in the methane-based market, and also it's a very high efficiency, high complex technology that does get great yields but the benefit of yields is not as relevant compared to the other technologies when you are looking at low natural gas priced environments.

So we are not seeing much there for us as we look at our portfolio of opportunities. We are clearly much more bullish on ammonia, power, LNG and also gas to liquids. Where we can find opportunities to participate in the ethylene market, perhaps as a constructor or in other areas, we will look at it, but from the KBR suite of opportunities, that is probably our least competitive, or least advantaged position.

Got it. Okay. And really a follow-up to some of the problem projects you have seen, clearly your construction opportunities could be fairly notable over the next few years based on shale and North American energy independence story. How are you looking at your construction [queue] execution even the issues you've had and really what do you -- how important a role is that construction group going to play as you ramp up your execution in the US?

Well the Construction business, if we look at where the man-hours are being spent, most of our construction man hours are spent an EPC projects in power, and downstream primarily. And they are doing well. Those have done fine. We did have the two headwinds and on one -- the one project we ran into lead contamination and the hurricane. Well if you're doing fixed-price work and you have increased cost because of items like that you've got to book the cost until you get the customer to give you permission to bill them for the change order in an entitlement sense, so we're working through that. That's a little bit of an oddball.

The one area we were surprised about has been the changing labor situation at the power project in Georgia. We had been there for a number of years, and all of a sudden it changed pretty dramatically for us. We can't tell yet if that's a systematic or market-wide trend or just something in an isolated geographic area. I do say -- I do see that most of our work that we are looking at going forward with our construction resources is very much focused on supporting the EPC business of KBR.

You know we look at the power projects, the ammonia projects, and other ones that we are involved in, we feel very good about the resource availability and our ability to perform. And so, as we get into resource trade-offs where we might find you know more project opportunities to participate as a constructor, either directly or as part of it EPC player, we are going to be moving more towards the EPC side. And we think that the highest and best use of that resource of KBR.

Got it. Thank you. I will jump back in the queue.

John Rogers, DA Davidson.

Good morning.

Hey John.

A couple of things. Sue, did you say the embedded profits in backlog, how much that was up?

What I said -- what I said was that the backlog -- the revenue backlog year over year, quarter over quarter, was up 27%, and I said the job income was also up 27%.

Okay.

For the same period.

Okay. So, and any comment then on the profitability in the backlog?

Well, we continue to manage our Business around the profitability in the backlog. We are pleased that we are continuing to maintain our backlog margin. Sue's comment applies that backlog margin is the same, which means that despite taking on a big EPC project, in Icthus, we are still selling some pretty good work at the remaining parts of the Business.

And I guess what I'm getting at is there is a big chunk of that backlog, 70% of Icthus that you don't, that won't go through your P&L that accounts for part of that 27% increase. So has the income gone up even more?

Well, the job income ( inaudible -- multiple speakers ) -- yes -- So, within the backlog accounts, the job income margin has not changed as our back log rolls into the P&L, margins will go up because the job income will go into the P&L dollar for dollar. The revenue backlog will go back in at $0.30 on the dollar.

Okay. Okay. ( Indiscernible -- multiple speakers ).

With respect to the Icthus project.

Yes that's what I want to make sure I'm clear on. And then you're comment on the labor change on the power plant. Could you -- what was the labor change?

Well this is the anecdotal discussion from the guys who are on the site and tried to explain to us how this happened, and they said there have been a lot of people working on that site for several years, and many of them working for us for several years, and the sense is they just wanted to work somewhere else. That's as specific as that. It was not a changing labor management regime, it was not a changing project complexity or safety issue, it just surprised us.

We thought it would be more predictable, and so we saw per diems go up, the wage rates creeped up a little bit. The turnover was higher. Maybe there's more competition in the Georgia market from other projects, which drove costs up and with that turnover can changed productivity, and it sort of cascaded down to where we had to reset or mark to market, essentially, the current labor that we see for the rest of the project into the P&L which gave rise to the loss.

And you said it was confined to this project. Given the growth in some of the industrial projects potentially in the US that you are looking at, how big a concern is this?

Well, it was clearly a surprise for us, and I think it has heightened our sensitivity to this issue on all projects we are looking at. It was something that maybe we had got complacent that it would be the same labor situation, but obviously, something changed in that market that caught us by surprise, so as we go out and do our labor studies, availability, traveling, per diems, wage rates, we are now having to look harder and factor that in. It has caused us to really look harder at what might repeat itself if we're not careful.

Steven Fischer, UBS.

Hi, good morning.

Hi, Steve.

Wondering if you could just comment on the utilization of your engineering resources and how you are managing staffing levels in the face of uncertainty on the timing of large projects? And related to this, that unallocated labor was a bit bigger this quarter so, I guess, what is your visibility to that over the next couple of quarters? Will that flatten out, or could that still go up? If these bigger projects don't start to come through.

Well, everyone of our resource centers, we track probably on the order of 20. We look at what is the existing contract back log burn off over the next 12 months, and then we factor in a weighted views what risk-adjusted views of new work that has been bid or expected to be assigned into that office. And so, we are obviously looking at where we are today with an eye towards where do we think we will be three to six months in terms of staffing.

So, we've elected to make decisions to keep people and lower our chargability targets at some of the resource centers, because we think the work will be ramping up in the next 3 to 6 months in a way that says we are better off holding and eating the cost now than having to go out and recruit people and try to deal with a less certain labor force as this new work comes in over the next three to six months. We have made that decision.

It is something that we think is prudent. It's been made on affirmative basis, it's not at an omission or -- oops, we missed it. We follow this thing really rigorously, and we're making a management decision to carry more non-chargeable labor now in light of what we see coming down the road for KBR, which has given rise to the turnaround we've seen in the labor cost absorption line in the P&L.

Okay. So, it sounds like maybe a little bit more headwind to go there on that line item.

I think we made some comments on that last quarter about how you think about the year, but that's probably -- we won't make any further comment, because if we thought it was going to be a longer-term issue we probably would take some different decisions.

Okay. And I guess this is sort of a related question, but the divisional overhead in IGP is coming down a little bit, but not quite in line with sales, and so I guess can you take out costs more aggressively in that division and I guess more broadly, are there any other places in the organization that you would consider taking any other types of cost out, you know non- as you said you were going to keep staffing around, but any other types of cost you could be more vigilant with?

Well, we're we pretty aggressive on costs. I think what you see is you know couple different things going on. One, for each business unit, and, again, we've made an affirmative decision to have 14 business units, you have to have a business unit head. You have to have sales guys, you have got to have project managers, and then support staff to run a business unit, and certainly these are very leveragable overheads.

If we double the volume, we are not going to double the amount of overhead in the Business. So as we bring it down, we are bringing it down and we challenge all of our business units every month about that, to bring it down to where you think the business will be over the -- not next month, or next quarter, but over the next 12 months. There are also some areas where we've got just some structural overhead in the North American Government business where we are trying to manage the very large volume of work that -- the tail work that remains on the big log caps project from '03 to 2011, and so we've got a big chunk of folks there who are working on those issues and they're all disclosed in our Q and our K about the magnitude of stuff.

But, we are trying to bring it down very aggressively, and I think you'll see that we will continue to be good stewards of overhead spending throughout the Company, not only at the corporate level but also in the business units. But they are, I think, appropriately-sized, given the work we are expecting to see in those units over the next 12 months.

Will Gabrielski, Lazard Capital Markets.

Thanks, good morning.

Hey, Will.

Can you just talk about a little bit more in Georgia, maybe looking at that as a parallel for what might happen eventually on the Gulf Coast. I would suspect that the big nuclear construction job down there is getting some competition for labor. So, as you talk about construction opportunities on the Gulf coast, and your willingness to maybe take some fixed price construction exposure, which we heard from one your competitors earlier this week, how would you go about managing that risk, and how comfortable are you taking that risk going forward, and is there any other way you can look to gain entrance into those projects without assuming the fixed-price exposure at this point?

Did you say that one of our competitors said that we are taking fixed-price risks?

No, said that they were willing to. I'm sorry. ( Indiscernible -- multiple speakers )

I think we would look at it on a case-by-case basis. Obviously, when you look at the risk from our view, you can either pass it on to somebody else or you can underwrite it yourself. Clearly, what we're seeing in the Georgia market may or may not manifest itself in other parts of the Gulf coast, depending on labor availability and where projects are.

We are very mindful of the expected ramp up in projects in US Gulf coast area over the coming years and have done our modeling on the construction labor peak that we would see in 2014, 2015, and 2016. I think that's going to put a lot of strain on the resources, and we are going to look real hard about what we take as a lump sum, and how we can make sure we've got enough contingencies, risks, and profit in it so that if we take that decision it will be a good decision. I think we have to look at how this market evolves.

But if everybody's expectations are manifested in the projects that come forward, we're going to have some labor challenges in the Gulf coast area, and we will just have to play that one one at a time, depending upon do we really think we can manage that risk. Certainly today if we signed up a project for November 1, we are not going to be in the field in any material way for another year, so we've got to forward project where that inventory of projects are and what it means to the labor resource.

Okay. And just as my follow-up on your comments, has something changed structurally, because you hear everyone in the industry talking about the risk of labor shortages in the US, specialized labor, skilled craft labor, et cetera, and everybody wants to sell perform direct hire on this construction work, but it seems like no one's talking about maybe a shift towards cost-plus and leverage swinging back toward the contractors. I'm just wondering what that would be the case, unlike five years ago when we are talking about this type of shortage globally, that you know the mixing in the shift more towards cost-plus work, does that leverage not exist for some reason right now, or do we just need to get into the cycle before it develops?

I think most of what we've seen in the US because of the very high degree of hands-on involvement by the customers in the projects, you probably see more cost-reimbursable construction than you do in other parts of the world. And I think that's going to continue. I think you are going to see owners wanting to understand what the real risks are, and be able to apportion out who's got resources to be able to do that work on an effective basis.

I think you'll see a lot more interaction with customers. If it does get as challenging as we believe it will be for construction resources, then the pricing for fixed-price is going to have a significant premium, so the owners are going to have to make decisions on am I willing to pay a very high premium for the risk of getting a fixed-price construction, or should I take it on a much lower cost basis on the cost reimbursable. And that's an owner's decision.

All we can do at KBR is price the risk as we see it. I think we do have a good view in the market and I do think we do a good job of assessing and pricing those kinds of risks, and the owners have to make their decision on how they want to contract for that work over the next couple of years.

Chase Jacobson, William Blair.

Hi, good morning. Thanks for taking my question. Sue, just a quick question. You mentioned that Gorgon contributed about $10 million to non-controlling interest. Was there anything included in job income related to that? I think (inaudible) incentive payment?

So, that's how it works. So, the comment that I was making was trying to give you guys a bridge from what our typical non-controlling interest runs to where it was, and so the $10 million is our partner's share of the incentive payments, which means that 100% of that was in the job income.

Okay. So, it was 10 and 10 ( Indiscernible -- multiple speakers )

Our share of GORGON we talked about previously is 30%. So, for every dollar of Gorgon profit that shows up in gas monetization, $0.70 is backed out of non-controlling interests. That's how you would do the math.

Got you. Thanks. And then in the context of the Roberts & Schaefer acquisition, and how that has performed over the last two years, when you look at growing your share of the wallet on some these projects and other acquisitions you're either looking at or that you have looked at, can you talk about how maybe you are changing the way you do the due diligence on what the history of the target company is?

Well I -- I'm having trouble putting together the question because I think as we look at the projects and the share of wallet, we are trying to do projects, certainly in oil and gas beyond, and other businesses beyond just doing the engineering. We talked about project delivery at Shadanese, Atkosar and quoting LNG. When you think about the Roberts & Schaefer project, the acquisition, that somewhat of a different question. I think we've got to look -- some of the takeaways we have there we've got a look at -- look at better the capabilities of the people doing fixed price work, and their ability to deal with the complexities, and so that was a lesson learned.

We've got to clearly understand what the customer's buying, how they buy, while I am very pleased with shale gas developments in general for KBR, it certainly has been an area where in this part of the portfolio it was adversely impacted. But you know from a broader standpoint you know we're pleased with the acquisition. It has given us you know -- we are now perceived in the minerals sector as being a minerals player, not a hydrocarbon guy trying to sell in the minerals market.

So, it has been successful there. It has gotten us recognition for the projects and capabilities of the people at Roberts & Schaefer, which are still very good and we just need to make sure that as we continue to integrate that business into KBR that you know the processes, systems and culture regarding project execution can continue to be transferred into that organization.

Okay. That's helpful. Thanks.

Robert Connors, Stifel Nicholas

Hey, Sue. If you could just clarify more for me, you gave some detail of the $2.9 billion and the KBR work scope with four commitments with contingencies? Can you discuss what the $2.9 billion entails, whether it be procurement or labor and when you are expected to forecast to use such forward commitments? And also what does the $350 million entail?

The $2.9 billion, we made comments previously. We've got a lot of back-to-back procurement with GE owned compressors, Siemens on motors, things like that, that technically are not an open fixed-price exposure. If you wanted to get precise it's more of a credit risk, on those.

And the other do you risk aspect is that some of our labor where we have a certain amount of pain that we take before resuming to a cost-reimbursable base. So we feel really good about the 89% of the backlog that is technically listed as fixed-price terms of how we've covered that exposure, the remaining $350 million is materials, steel, aluminum wire, cable, the normal stuff that you see on the normal kind of project that gets bought out in time and we've done our forward pricing and we've done estimates of what that would be at the time we are expected to purchase those elements.

Okay. And, I guess you are probably not able to discuss, but any sort of discussion as far as any sort of labor rate increases you would need to see before it does which over to cost plus?

Well I -- probably you are right, we're probably not willing to comment on it. The risk is on aggregate dollars, so whether it's labor rate increase or productivity leading to more hours, it's just the dollar exposure we are referring to.

Okay. And any status on the update of Jazon, just some recent trade press that some of the subcontractor costs have been a little bit higher than originally forecasted due to the remote nature.

I don't really have anything to add to that. It has not bubbled up to our screen and our reviews of the project.

Okay. Thanks a lot.

And now I'd like to turn it back over to Mr. Bill Utt.

Thank you all very much for tuning in with us on the KBR third quarter earnings call. We appreciate you're following KBR, the questions you had, and Zac and Sue and Rob will be available over the coming days to answer any subsequent questions you all may have regarding our presentation and discussion. Have a great day and thank you very much.