KBR Inc (KBR) 2014 Q3 法說會逐字稿

Good day, and welcome to KBR's third quarter 2014 earnings conference call. This call is being recorded.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for KBR's third quarter 2014 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 KBR's third quarter results is also available on KBR's website.

Joining me today are Stuart Bradie, President and Chief Executive Officer; and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call, Stuart and Brian will cover the quarter's results in more detail and discuss our market outlook by major segment. Please refer to the accompanying presentation that is posted on our website at kbr.com. After our prepared remarks, we will open the floor for questions.

Before turning the call over to Stuart, 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 significantly from our forward-looking statements.

These risks are discussed in KBR's third quarter earnings press release, KBR's earnings presentation, KBR's Form 10-K/A for the period ended December 31, 2013, and KBR's current reports on Form 8-K. You can find all these documents at kbr.com. Now I'll turn the call over to Stuart. Stuart?

Good morning. We'll take you to the first slide dealing really with KBR's safety. And safety is a core value at KBR, and we start every meeting with a safety moment when there's more than three people in the room. Looking after yourself and those around you is a moral and a business imperative and it needs leadership commitment.

And at KBR, we are refreshing our focus and energizing the organization with the goal of zero harm through continuous improvement. And as you can see, we are making some progress. So moving on now, I'd like to just turn to the quarter overview. In short, a better quarter with strong reimbursable bookings in Hydrocarbons and a good cash position, but, frankly, still too much noise, albeit, there's a balance to the puts and takes.

EPS improved to $0.21 which is not acceptable, albeit, an improvement of over, I guess, a loss of $0.32 from the same period last year, and a loss of $0.06 in Q2. Operational performance was as expected in Gas Monetization and Hydrocarbons with the exception of a now resolved welding issue on a Hydrocarbons project, and bookings in Hydrocarbons exceeded $1 billion with over $900 million in reimbursable EPC in Engineering Services, which gives us a good balance to our backlog portfolio.

Pleasingly, Services stabilized in the quarter with all the businesses in that segment in the black and the net position in Canada was largely unchanged. IGP continues to lag, and this was driven largely by ongoing performance on EPC power projects. Cash was again a good story in the quarter, and I'm pleased to report we resolved a number of the legacy commercial issues. The strategic review is on schedule and we're booking and locked in an Analyst Day in New York on December 11 and invitations will go out for that, I think, later today, Zac.

I'll now hand it over to Brian who will take you through the numbers in a little bit more detail.

Thank you, Stuart, and good morning. Moving on to slide 5, you will see at the top of the page, the bookings of just over $1.3 billion were relatively strong, as Stuart previously mentioned. That's driven primarily by our Hydrocarbons segment with the $1 billion of bookings and $900 million on reimbursable contracts.

Backlog at the end of the quarter is $12.1 billion and that reflects a decline from the year ago, but as we have been speaking about for several quarters now this is largely related to the Gas Monetization projects burning off with the next round of bookings expected in 2015 on those negative-type projects. Moving on to the actual performance for the quarter, as Stuart mentioned, Gas Monetization continues to perform very well, particularly on the two mega LNG projects in Australia.

Hydrocarbons performance, again, was good with the one exception of the welding issue that we previously mentioned, but that increased the cost for the quarter by $18 million pre-tax. Services stabilized and, I guess, the good news is that there was no real news out of Services compared to where we've been. IGP is where all the noise occurred for the quarter. We had an increase in forecast cost to complete an EPC power project here in the US and that was about $33 million pre-tax.

We resolved a number of commercial issues and that resulted in a net gain pre-tax of about $8 million. However, we still are incurring significant legal fees, and we had $4 million in the quarter with ongoing disputes. And finally, one of the disputes we did settle was the tax sharing matter that we had with our former parent and we recorded a $24 million pre-tax gain associated with that.

Finally, on this page, I want to point to the corporate overhead number, you see that that has come down from a year ago. It reflects the conversations we've had in the past about trying to reduce ongoing costs. Moving on to slide 6, comparing the segment information, you see the revenues were relatively down from a year ago, but, again, it's consistent with what we have been saying on the Gas Monetization, and that's the burnoff of two projects that we had in 2013, Skikda and Escravos, both of which are largely completed.

Hydrocarbons, you see the revenues are increasing, and, again, as we've been saying in the past, related to the EPC work that we're doing in the downstream industries here in the US. But during this quarter, we also have picked up some additional Services bookings, more in the upstream side. Moving on to the profit and earnings for the quarter, the Gas Monetization variance from a year ago reflects the large change order that we had booked in the third quarter of 2013 which did not re-occur. In Hydrocarbons, we talked about the welding issue. IGP has the cost associated with the power project, as well as the settlement of the various disputes.

Services is stabilizing. You see a significant improvement from where we were a year ago which, again, 2013 was the start of the problem projects that we had in Canada. The other gross profit reflects a $13 million year-over-year improvement in the utilization of our labor and reduced costs, and that's, again, an area we have been working on throughout the year. And finally, the other EBITDA reflects the settlement of the tax sharing dispute that I talked about previously.

Moving on to slide 7, to compare Q3 with Q2 of this year, the revenues were relatively flat. Moving on to the earnings, the only thing that I'd point out here is in the second quarter we had a $15 million benefit relating to an insurance claim that settled in IGP which did not re-occur during the quarter. Services, as we mentioned earlier, has stabilized and the MMM joint venture offshore maintenance vessels that we have in Mexico are under contract and also helped contribute to the earnings for the quarter.

Moving on to cash, on slide 8, we had a strong operating cash flow quarter generating $158 million in operating cash flow. You see the cash balance was a healthy $1.048 billion, however, most of which of that remains overseas with $710 million abroad. But the capital allocation remains a priority for us and you see during the quarter we returned an additional $17 million to our shareholders. And that gives us $137 million returned so far year-to-date from both share repurchases and dividends, and in total, we've returned to shareholders just under $1 billion US since the spin back in 2007.

The share count is down to 145 million and we've actually repurchased 3.8 million rather than the 3.7 million shares you see on the slide. CapEx, $12 million for the quarter, $7 million related to the ERP rollout. We are reviewing all of our CapEx expenditures going forward, including ERP, and we will have more about that when we talk to you on December 11 when we're talking more about our strategy.

And with that I'll turn it back over to Stuart who will talk about some of the markets with which we participate.

Thanks, Brian. Moving on to slide 9, on the market outlook for Gas Monetization. As Brian mentioned earlier, the work continues well on the two mega projects in Australia. We're starting to get a bit of momentum behind the Shell Global LNG Agreement. We're seeing quite a lot of activity in the pre-front end, engineering design phases of the Gas Mon business.

I guess the major FEEDs in process are those completed, I guess, the update on there is that during the quarter the KBR/JGC/Rekeiysa JV was awarded the FEED and EPC bid opportunity for the Tangguh Train, and that's a BP-led venture in Indonesia. And that's a two-horse race against another joint venture consortium. The work goes on in terms of bidding for the three multi-billion US dollar EPC contracts, the Pacific Northwest to patronize -- the bids were submitted and we continue to work with the customer. Award is still scheduled for next year.

Lake Charles, the bid for that is ongoing and, again, award expected next year, and the Tangguh LNG in Indonesia I've already mentioned. I think just dealing with this head-on, I think, the market fundamentals in LNG remain sound, but with capital discipline being an ever increased focus and some of the uncertainties around politics and environmental issues, et cetera, around these big LNG projects, there is a continued uncertainty in FID timing.

Moving on to slide 10, in the Hydrocarbon segment, we've talked about the Q3 bookings being strong in the quarter, and some highlights there, the Koch Nitrogen EPC which is a reimbursable EPC was awarded in the quarter. The work for INEOS, again, reimbursable EPC during the quarter. Pleasingly, we also picked up, I guess, the FEED for the ENI's Mozambique FLNG and that leads to an EPCIC submission in the summer of next year.

We continue to work in the Gulf of Mexico on BP's Mad Dog Phase II project and we signed a master services agreement with Statoil in the quarter. So our continued presence in North America continues to be strong. We are now executing four EPC ammonia/urea projects in North America that really differentiated because of KBR technology and we're currently bidding two additional projects with expected awards late this year and early next year.

Chemicals continues to be a really strong market and in significant new opportunities and were also executing a number of FEEDs in the downstream in the chemicals sector with EPC rollover opportunities. Downstream in the Middle East remains strong also, and our technology markets led by global ammonia, as well as other chemicals, again, remain strong.

We do have some additional offshore project pursuits and particularly in the UK and Norway and the North Sea. But I think it's, again, sort of dealing with this head-on. I'm sure there will be questions on the oil price. I think our perspective on that is that there is no panic from the IOCs that we've talked to. I think $80 oil was around three years ago and projects still proceeded at that time, however, I think there will be ones that are at the margin will be economically challenged.

There is definitely an increased capital discipline coming from the majors. That said, our principal exposure is in the downstream and chemicals market, and Gas Monetization, and that remains very attractive with the lower gas prices. Moving on to IGP, our work in the UK for the Ministry of Defense, really around long-term facilities management and maintenance contracts continues to perform really well.

And I'm pleased to say that we are confirmed as preferred bidder for the UK's Ministry of Defense fixed-wing training contract, which is over a $700 million US contract. We are in joint venture, 50-50, and essentially we've got a procurement period of three years to acquire a number of aircraft, and then a15-year contract to train the UK Ministry of Defense pilots over that period. Again, an annuity-type contracts which fits.

We're still seeing a lot of international government services opportunities. The UK Army, for example, they are having to return all their armed forces from Germany back into the UK by 2020, and that's a significant opportunity given that we already did the housing and the rebasing of the military in Salisbury previously. We're seeing a lot of opportunities in the expeditionary support services for the UK, as well, and for the UK police and local government services.

Our Australian defense force support services, again, we're continuing to see good opportunities as they move through their outsourcing program. We're going after a number of US overseas-based operations support, again, in the facilities management area supporting the US government. One thing I would like to point out on this slide is that the strategic review will consider the future for fixed-price EPC power projects.

Moving on to Services, we're seeing continued opportunities in North America for Industrial Services under US construction and for the latter, particularly as a differentiator supporting our EPC offering. The Mexican offshore business, longer-term contracts, as Brian mentioned earlier, puts us in good shape there. And I think our offering, and we're first in the market doing some of this stuff in Saudi Arabia and Poland, is also attractive. I think the Canadian market overall for Industrial Service, the maintenance side of our business, is attractive. In the long term, I think the current focus is quite correct and actually stabilizing on the three remaining module assembly projects, and we have made some progress in that area. But, again, trying to deal with this head-on. The current oil price would give cause for concern that the near-term Canadian greenfield prospects would be economically challenged.

So moving on to slide 13, I mentioned this a little bit earlier, where we are in the strategic review. The process continues and I'm pleased to update you that it's on track as promised. We'll discuss the results at the Analyst Day on December 11. We will also webcast that meeting.

Decisions taken could impact annual goodwill and other intangible impairment analysis and may result in restructuring charges. The plan is to reintroduce guidance, as promised before, with the year-end financial results going into February 2015. So in summary, 2014 is a transition year. I've said that before. The strategic review will be completed in Q4 as promised.

Gas Mon and Hydrocarbons continue their strong operational performance. Services has stabilized and IGP is impacted by charges on power projects. Strong Hydrocarbons bookings on reimbursable downstream and oil and gas projects. We solved a number of legacy issues in the quarter, which was very pleasing.

We are pursuing a large number of opportunities through pre-FEEDs and FEEDs and into EPC, and the backlog of projects, our robust pipeline of prospects and a greater focus on efficiency makes us cautiously optimistic for 2015. We plan to continue focusing on resolving commercial disputes and capital allocation efficiency. Thank you.

Now we'd like to turn it back over to the operator for questions, please.

Thank you.

(Operator Instructions)

Tahira Afzal with KeyBanc.

Good morning, folks.

Good morning.

I guess we can't talk much, get a qualitative sense about next year and restructuring on this call given you have slated those two events to come up.

So I guess the two questions I'll ask, Stuart, I know the first or three months, you already spent a lot of time interacting with customers, going and checking out the head offices, et cetera. Could you talk a bit about how your focus has migrated over the last couple of months in terms of what you've been looking at?

You are absolutely correct. I spent the first little while going around the world meeting our customers and our clients and our partners. I think the one thing I would say is the bones are good at KBR, the people, the processes, the brand are all good. And so, really, the focus now is really thinking about how we best sort of bring the business together maximizing the synergies that naturally exists, and looking at how we can become more efficient into the future with the backdrop of where strategically we want to take the business.

And that includes what businesses we really want to be in and the ones we want to invest in going forward, but also taking a long hard look at the businesses that we perhaps don't want to be in. And then from there actually looking at how we actually migrate the culture, as well, to one that's very market facing, more empowered and highly accountable, which I think is the right focus going forward.

That's really -- so it's really around strategically where do we take the business. How do we best organize ourselves to take advantage of the markets that are attractive in the future, and who are the best people and what culture do we need to lead the business going forward. So that's really where I've been spending a lot of my time, as well as still engaging with our customers and ensuring that we've got that market facing focus.

Thanks a lot, Stuart, and as a follow-up, I know you did some buybacks in the quarter, but the stock did hit probably the lowest levels we've seen since the 2008/2009 crash. So surprisingly light given that.

Would you comment on whether you are in sort of an extended quiet period, perhaps if you are looking at restructuring? And could you be shoring up some of your cash as part of the restructuring in terms of could be restructuring also include some M&A opportunities?

Tahira, this is Brian. Let me start.

We had pretty good visibility into some of the quarterly results which precluded us from doing any open market transactions. That's one of the reasons why the activity was relatively light. As you know, once we have that, we can't participate in open market transactions, and we did not set up any advanced purchase mechanism. So that's the short answer on share buybacks for the quarter.

Thank you.

John Rogers with DA Davidson.

Hi, good morning.

Good morning.

Hi, John.

Couple of things. First of all, and I know you're going to give us an update in December, but when you talk about the strategic review and what you are looking at there, and you mentioned the goodwill impairment potentially, or restructuring charges, but the cash costs of all this, I assume, are going to be modest or potentially modest it would be more a deferral of expenses? Is that the right way to think about it, or do you want to hold off?

I wouldn't say deferral of expenses, I'm not sure I understand the --

You mentioned ERP and some of those?

Okay.

I think, obviously, any sort of goodwill impairment is not cash, and so you got the right to think about it that way. But certainly, some restructuring costs would be delayed costs, and ERP, again, would be a delayed cost. So it's a balance, I think.

Okay. And then, Stuart, just in terms of your discussions with customers and what you are looking at out there, do you have the sense, or could you comment on what pricing looks like with the slowness in investment decisions push out of some upstream work, and I don't know whether KBR has to come to the market more aggressively to win work, or just some thoughts there on how you are bidding work now?

I think that the way we are bidding work now is, particularly in Hydrocarbons, is coming through very strongly. I don't see that as a particular issue.

I think what is worth stating is that as I've gone around and talked to customers, I sense they would welcome a revitalized KBR and one that's aggressively out pursuing the market, and that's what our intent is.

Okay. Thank you.

Steven Fisher with UBS.

Thanks, good morning.

Stuart, you mentioned the uncertainty of timing in Gas Monetization projects. I guess that's not surprising. Is there a range of the degree of timing uncertainty? In other words, do you have higher confidence in any of these projects going forward on schedule versus some of the others?

Yes, that's a really good question.

I think Brian has mentioned on previous calls, these were the three the Company backed some time ago, I think there was a number in pre-FEED and FEED that we will talk about later as they evolve, but certainly there's been quite a bit of noise around the Canadian prospects at the moment and the Canadian tax regime in BC, the royalties position, and so there's a bit of politics there. You would be a good betting man to put any timing on some of those.

I don't think any of us on this call could work that out. But in terms of things like what's happening in Indonesia. BP has announced that they've signed the gas sales agreement to support Train 3. My expectation with that is that they've got the supply, they've got the demand, and so the economics, obviously, from their perspective work out, albeit, they haven't gotten EPC pricing in yet. But assuming that all works out, you would think that's a pretty robust prospect and I think similarly for Lake Charles.

But, again, with Lake Charles looking at British Gas, they've now got a new CEO, and I'm sure he's having a good look at their capital spend portfolio, but as it stands today, that's very much a tolling operation. And, again, the supply and the demand side of that is covered. So, again, as long as EPC pricing sort of stands up, then you would think that project has got a pretty good chance to go ahead.

I think you have to look at each of them differently. But certainly the low gas price is making LNG still a long-term good market for us, and the trick is, as you rightly point out, is which ones do you go after and which ones do you think have the best chance of proceeding to the next phase?

Great, thanks, that's helpful.

On the Hydrocarbon segment, where do you think you are in the lifecycle of the FEEDs and activity there? As you ramp up construction of what you've booked over the last year or so, and even more recently, are you replacing what you are going to burn at a faster pace, the same pace, or slower? In other words, do you have the prospects coming in that can kind of keep this business continuing to grow at a nice pace?

Yes, we think that part of the market is very attractive, and we're seeing a number of pretty robust prospects coming through the door. So I think to answer your question is, yes, probably in short.

Is the size of the prospects in Hydrocarbons getting bigger? In other words, do you need to win perhaps fewer to replace what you are burning, or is it about the same?

It's probably about the same.

Thank you.

Jamie Cook with Credit Suisse.

Hi, good morning. A couple questions.

First, I guess, Brian, what do you think is a reasonable time line for investors to expect less noise out of KBR's earnings? I understand you have made some headway on some of the commercial legacy issues, but we still have a charge here, we still have a charge there. You have been there over a year, so can you provide us sort of an update, and also an update on the two larger projects?

And, I guess, Stuart, the second question is for you. I don't want to steal thunder from the analyst day, but from looking at the slides, it appears to me what we're going to hear at the analyst day is, does it make sense to be in power if it is fixed-price? If you are in government, maybe you go more international. Construction in the US is a bigger focus, and then maybe we streamline some costs, but that is sort of the gist of it, or is there anything more meaningful there?

I'm just trying to read into -- from the retirements that you had in IGP recently too, if that's shedding some insight on the strategic importance of the division? Thanks, I'll get back in the queue.

Okay. (laughter) I'll take the first shot.

In terms of noise for the quarter, Jamie, the commercial disputes we have that contribute to that, we're working as hard as we can, but we're not going to settle things unless it makes sense for our shareholders. It's hard to predict when you're going to get commercial sentiments of legal disputes. It takes two to come to an agreement. We have made some good progress, and I want to point out for this quarter, it was a net gain on these settlements.

In terms of the power project that you are referring to, the charge on the power project -- that's all driven by execution. That's an execution issue and the accounting follows the execution.

I can't guarantee there won't be any more charges related to projects, but, again, I don't think that's something that's a legacy type issue to clean up. It's going to be driven more on performance in the field.

Sorry, before Stuart, Brian, just an update on Skikda and Gorgon, just the larger projects because there's still a concern there's another shoe to drop there?

On?

Skikda, on the larger projects, yes. Like we've seen noise from the smaller projects, but on the mega projects in Gas Mon, like Ichthys, just how are they trending relative to expectations?

I'll probably answer that, Jamie.

I think Gorgon is, the commercial basis for that for us it's a reimbursable project. So I think the challenge there is just to keep working that to help the client get it on-stream. But I don't think there will be any commercial noise on that, I'm not expecting any.

And then, on Ichthys, that's a mix, it is a mix of lump sum rate and reimbursable and we're just moving through that. So far so good, and we've got a lot of scrutiny on that from a commercial management and execution management basis. But the feedback from the reviews we've done recently are that we've -- it's going as we would have hoped.

Okay, and then, just, am I totally off in my read on your analyst day in December?

Oh, I think, Jamie, you know I can't answer that question, but a good try. (laughter) Let's have a chat in December about all of that. I'm very conscious of the fact that whatever we say we have to deliver on that promise, and I would rather be ready to say it at that time.

Okay. Thanks. I'll get back in queue.

Andrew Kaplowitz with Barclays.

Good morning, guys.

Good morning, Andrew.

Brian, can you talk about cash generation going forward? You have, obviously, put a strong focus on cash generation, I think, since you came to the Company. Can you generate free cash closer to net income going forward? And will the cash continue to sort of move towards US cash, because it seems there was much more foreign cash in the quarter? Could you actually see a majority of US cash if you go over the next year or so?

I think the answer to all those questions is, yes. We do have a significant focus on cash. The cash generation, though, in part, is driven by the type of contract.

So to the extent that we have more reimbursable type contracts, it's harder to have a favorable working capital movement on those projects versus more of the fixed-price contracts, which tend to have more milestone type payments. But there's no reason why we shouldn't be generating cash equal to our earnings. And typically, we have a mix of fixed-price and reimbursable type contracts, so that certainly is the goal.

And a lot of the work we have won recently is out of the US.

Okay. Stuart, maybe just on the topic of risk control. Since you've come to the Company, can you talk about your assessment of risk control over the last -- how is it -- when you step back, how do we assess risk for the Company because we keep seeing this noise? And, I guess, what I'm trying to figure out is it good enough at KBR, or as part of the strategic review, do you tell us you are putting in extra layers or anything like that?

I think that is a fundamental piece of the strategic review. I would say that KBR does really well in some areas of risk management, and, clearly, it's not done so well in others. And the whole emphasis going forward is to ensure there's a consistency of process, there's the quality of personnel, and there's an understanding of what we're are good at and what we're not good at it. And I think if we can apply those three in a consistent way, then you will start to see less noise coming out from the execution.

I guess what I'm trying to say, Stuart, is risk assessment simply not as developed as you thought when you came to the Company?

No, it's really highly developed, and I think -- one of the good and bad things about KBR is it's had some horrific experiences many years ago in the EPC environment, we know, that almost brought the Company down. I think one of the takeaways -- well, one of the only positives of that is you get really good at risk management.

And I think where we've strayed, I think, looking at the Company is we've not applied that process consistently. And that's what we're going to do a lot of work to make sure that we do that going forward and we'll talk more about that at the strategic review.

Okay. Thanks, guys.

Jerry Revich with Goldman Sachs.

Good morning. It's Matt Rybak on behalf of Jerry.

I was wondering if you could say more about how you were thinking about North America LNG opportunities beyond Pacific Northwest and Lake Charles, particularly in the context of what might be perceived as a slowing opportunity set? And then, if that is the case, what end markets do you expect to offset some of the softness?

As I said when I presented, we do have a number of ongoing pre-FEEDs and FEEDs. We've talked before about Gulf LNG, and there was some press yesterday about what we're doing in Canada in the pre-FEED arena. So we're seeing a number of those opportunities. So I'm not seeing a slowdown in that area. But I think it's worth pointing out that where we are seeing an increased activity is in the chemicals and the downstream sectors. And as you would imagine, taking advantage of the cheaper gas price.

Got it. And then turning to the Services business, can you possibly quantify what, if any, impact the Canadian pipe and modular assembly projects had in the quarter and maybe say a little bit more about how you are thinking about the profitability trajectory of the Services business going forward?

In the quarter, the net result in Canada was largely unchanged. So I think they've done a really good job of stabilizing the performance on those projects. So that's probably the first statement. And I think, again, as part of the strategic review and, I guess, the reducing oil price, you have to be cognizant that the cost of production in Canada is one of the highest and it becomes the first to be affected by those oil prices.

So is it fair to think that you can continue in the black going forward in this business, or as you touched on earlier, maybe there is some lumpiness in the performance going forward still?

I think the objective will be setting up businesses, well, in all our businesses, truth be told, is that they are not going to operate in the red. So if the market shrinks, we have to shrink the business and the footprint to manage that.

Thank you.

Robert Norfleet with Olympic Global Advisors.

Hi, good morning.

Good morning, Robert.

Just a quick question on the awards in the quarter. Obviously, a great job in the Hydrocarbons area. I guess my one question was around the 90% of that being cost reimbursable. Is that more by choice given the risk tolerance of the Company, or are we actually just seeing that trend take place, especially in the North American environment where we're seeing a lot more cost reimbursable things versus fixed-price work, especially in the chemicals side?

I don't know if it's a trend, but there's certainly a balance of risk in the thinking, both of the customer as to who is best to take on that risk. In certain areas in the US, the labor market is very hot and in the Gulf Coast being a perfect example. The productivity risk and the wage escalation risk is shared at worst than best taken by the customer given the size of their balance sheet.

So I think you will see a balance, but where you can actually ring fence it and you can provide your own labor force there's more appetite from lump sum.

Okay. Great.

(audio difficulty) just deals with margin. Even when you back out some of the noise in the quarter, the project charges and one-time items, the Hydrocarbons and Gas Mon, obviously, we're still well-off where historic margins have been.

I know this is partially due to price, labor absorption, lower utilization rates, but I guess two questions I had. One is, is there anything structurally different in these businesses that margins can't get back more traditional levels, especially in the Hydrocarbons area, kind of in the mid- to upper-teens?

And number two, I'm just trying to get a sense, is it work being booked today that's going into backlog at higher margins than the existing legacy backlog?

Well, Rob, this is Brian.

You have to keep in mind, for Hydrocarbons the type of projects has changed from the more recent past. If you go back to 2012 and early 2013 there were a lot more services type contracts. Now we have moved to a much more EPC.

And EPC by definition will have lower margin. Higher aggregate dollars, but lower margin given the construction activities. So as long as we continue to book EPC, the margins will be less than they've been, looking at periods that were primarily services.

I don't think the service component itself is any different, but just given the nature of construction, full EPC and the size of the project, you are always going to see margins lower than if we just did professional services, particularly in the oil and gas technology areas.

Okay, that's helpful.

And how about just in terms of pricing right now as it relates to work that we are bidding versus legacy backlog pricing?

I don't think there's much change, but, again, the mix of projects is changing.

Okay. I guess I'm just trying to get a sense, some of the companies, some of your peers, obviously, are seeing improvement in margins both because of utilization rates, not necessarily better pricing, but mix being a dependent of that, and in some cases seeing projects, especially North America, move more towards a fixed-price basis.

I guess my question really gets down to, is that big booking in Hydrocarbons where we had 90% cost reimbursable, is that likely a trend that we should see over the next few quarters, or are we going to see more fixed-price work as we continue to see bookings increase?

I think I tried to answer that the last time. I think it's a balance. It will be appropriate to who is best placed to take that risk depending on where in the country and what phase the project is in its evolution.

I don't think for us we are seeing a trend. I think it's a specific project.

Okay. Thanks a lot.

Martin Malloy with Johnson Rice.

Good morning.

On the project in Hydrocarbons, you had the $18 million increased cost on, an then the IGP project with the $32 million increased costs, are those projects both complete or how much do they have to go?

So the Hydrocarbons was a welding issue and the project -- was a welding issue and that issue is now resolved, and that project is now progressing and that issue, as far as we are aware, is behind us.

In terms of the power project, the way that one is done is that we were doing an estimate for cash cost to complete and we continue to work on that to get the accuracy. It's about, I think, that particular project is 85%, 86% complete.

Okay.

And then with IGP, even backing out the $33 million, the margins were pretty low. Is there anything else within that segment that was weighing on the margins this quarter you can talk about?

No, the legal fees are most certainly a headwind in that business.

Okay.

The margins in that business are not acceptable at the moment.

Okay.

And, Marty, I would point to the volume of business in the US government side has declined dramatically given the LOGCAP IV rundown, and you know LOGCAP III is over, so there's a volume issue on the US side. The UK portion continues to perform very well.

Okay.

And then, if I could, one last question on the MSA in Canada on the fabrication side, I think one of those stretched out a little bit a couple years and you were, I think, working to try to mitigate your risk under that. Anything you can talk about there?

Yes, we have not received any additional orders from that client throughout this year. We have no new orders in all of 2014 from that client. And when you think about it, the client knows that we're very busy in our facilities there.

So schedule is always important to clients and we're busy. So there are other options available to that client. And, as I said, to date we have not received any orders at all this year.

So we remain with three of the seven projects, and those three are progressing, and they should be complete in 2015. And each month that passes, obviously, our risk profile declines.

Great. Thank you.

Thank you, Marty.

Vishal Shah with Deutsche Bank.

Hi, this is Chad Dillard on for Vishal. How are you guys?

Good.

Good, thanks.

So now that some of the ethylene crackers have moved in construction, can you talk about the derivatives opportunity you see ahead of you? Can you just comment on the level of FEED activity you are seeing? And then, how should we think about the peak award timing for this space?

I think, as I said before, that market continues to be extremely buoyant. We're doing a number of FEEDs at the moment, both in the refinery and the derivatives area. I think it's a very attractive market in North America right now, so I think the timing of awards will progressively come through next year and beyond.

I don't think we can put a pin in the map and say you should think about peaking at such and such a month. I think the way to look at it is it's an extremely good and buoyant market and there's a number of opportunities coming through, and I'm sure you're hearing that from others in the market, as well.

Sure. So given your strength on the naphtha base portion of ethylene technology and the recent declines in the price of oil, are you seeing anything in terms of like a pickup of interest or conversation with customers in that business?

Not yet. But you could assume that will happen, but not yet.

That's it for me. Thank you.

Brian Konigsberg with Vertical Research.

Yes, hi, good morning.

Good morning.

Just coming back to Canada and the master service agreements, just curious, you noted the increase hesitancy as far as greenfield projects in Canada. Do you think that, just kind of the environment is inhibiting some of the additional orders under those agreements? And, I guess, perversely, is maybe protecting it from additional charges related to producing more modules which were mis-bid?

Potentially, but I think the work that's been done and actually going to talk to our customers about the position that we are in -- no one wants to, in truth, nobody wants to give an order under a commercial basis that forces a struggle all the way through. These are material clients.

They understand where we are at, and at the end of the day, it's not good business. So I'm not expecting that to -- I think both of them actually mitigates the risk.

Got you. And just, secondly, going to the balance sheet, and maybe this is more for Brian, with the strategic review and, obviously, I don't want to get too far ahead of it, but your unbilled receivables, both current and non-current, still remain pretty elevated relative to your sales, which I would think, indicates there is probably more costs there being disputed within projects you are currently executing.

Is there a high potential that we could see a write-down of questionable receivables, as well, under your review, or do you feel comfortable with where things stand today?

Well, Brian, as you know, if we thought that was the case we would have taken it now in the third quarter. So the answer to that is, no. But when you look at the working capital of contracts they are relatively flat. So we have some buildings in excess, some cost in excess, but you know me well enough that I'm not satisfied with having a net receivable. I much prefer having a net payable when you look at the working capital accounts for contracts.

So we have some opportunity for improvement there on cash flow, but a lot of that has to do with existing terms and conditions, and in some of the cases in Canada where we don't get to bill until we have completed shipping, as an example. So things could improve, or will improve on those projects as we get to the end of the remaining three. But also it's an area that I acknowledge that we can do a little bit better on in terms of getting terms and conditions that make invoicing more efficient and making the collections, therefore, faster than maybe what we currently have.

Thank you very much.

George O'Leary with Tudor, Pickering, Holt & Company.

Good morning, guys.

Good morning.

Just one for me, on the chemical side, we are seeing the US kind of ramp LPG exports and even starting to export some ethane in pretty dramatic fashion over the next few years. So in that vein, are you guys seeing international opportunities on the petrochemical side and chemical side converging in tandem with some of the North American chemicals and derivative projects that are out there?

Yes, we are, and particularly from the Middle East.

Okay. That was it for me. Everybody else hit my other questions. Thanks, guys.

Thanks.

Robert Connors with Stifel.

Good morning, guys, how are you?

Good, thanks.

If I look at just KBR the past couple of years, there were really only two acquisitions that affected the goodwill; those were the BE&K and the Roberts & Schaefer. I'm just wondering which one of those end markets is affecting your outlook and where the possible goodwill write-down could come from?

The Roberts & Schaefer acquisition was -- they came out of the minerals and mining business. I think you could say that the market there, I think we're starting to see it come back a little bit, but it's been a struggle.

Okay. And then, just around the restructuring charges, just what you expect to take, qualitatively are the majority of them centered still around the Asia-Pacific region?

No.

Any flavor you can give us or is it just wait and see?

I think we'll be looking across the whole of KBR as to where we can get more efficient.

Okay. Great. Thank you.

Michael Dudas with Sterne, Agee.

Hi, good morning.

Any indications in your technology business of improved opportunities from maybe EPC, and are sales picking up, and in some areas there that certainly we may want to hear about in the December analyst day meetings?

I think the first thing I would say, we think technology is a really good business. Our growth in that business over the last few years has been very strong and we've taken the business not only from selling the technology, but also into the proprietary equipment arena, which you know is also good margins.

And I think we're seeing a fairly good market for our technology globally. And it does give us a differentiated position, not in all cases, but in project specific, particularly cases we'd sort of move in when it's appropriate into EPC. And I think as an entry into that it's a terrific differentiator.

Okay. Great. Thank you.

John Rogers with DA Davidson.

Hi, thanks. Just a follow-up.

I guess, first of all, Brian, in terms of your cash collections, especially over the remainder of 2014, are there significant payments due from the (audio difficulty) remaining from the unconsolidated entries [into these]?

Significant payments, no.

This quarter?

No. Nothing to the volume of this quarter. We will continue to collect some.

As you know, the Ichthys project is not consolidated, as an example. We will go back probably to more the normal course.

Okay.

And then, just one more in terms of the strategic review. Are there portions -- as you look at the operations, sort of the various segments, are they all largely need small modifications, or have you gone so far as to think you might get out of the entire segments as a whole in the sense that you might be able to sell them for some core value?

I think that's almost like Jamie's question really. I think maybe you have to be patient with us. It's only a few weeks away when we can actually come and tell you exactly where we are heading down that path.

I think what I would say is nothing is off the table.

Okay. Appreciate it.

That is the end of the question-and-answer session for today. I'd like to turn it back to Mr. Stuart Bradie for any additional or closing remarks.

Firstly, thank you very much for taking the time today to tune in and listen. I think this is a journey for KBR, and I think we're making good progress, and hopefully I'll get to meet some of you, or most of you, hopefully, face-to-face in New York. Thank you very much.

This concludes today's conference. Thank you for your participation.