KBR Inc (KBR) 2013 Q4 法說會逐字稿

Good day, and welcome to the KBR's fourth-quarter and annual 2013 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 and Communications. Please go ahead, Sir.

Good morning, and welcome to KBR's fourth-quarter and annual 2013 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 fourth-quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President, and Chief Executive Officer; and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

During today's call, Bill will provide an overview of KBR's fourth-quarter and annual 2013 operating results highlighted in a number of key areas from each of our business groups. Brian will then provide more detail on the key financial takeaways for today's call.

Lastly, before opening 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 KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that can affect operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in KBR's fourth-quarter and annual 2013 earnings press release issued last night, KBR's form 10-K for the period ended December 31, 2013, and KBR's current reports on Form 8-K. You can find all of these documents at KBR.com.

Now, I will turn the call over to Bill. Bill?

Thanks Zac, and good morning, everyone. Q4 was a strong bookings quarter for KBR, both in aggregate with a book-to-bill ratio of 1.1, and across our major business groups, with three of our four business groups having book-to-bill ratios greater than 1. KBR also delivered $209 million in operating cash flow during the quarter.

Additionally, our Board of Directors has reviewed and approved our capital allocation strategy. Most notably, they have authorized maintaining out current dividend and have initiated a new $350 million share repurchase program, which terminates and replaces a buyback program previously announced in 2011.

The Board of Directors actions affirm our long-standing commitment to efficiently returning excess cash to shareholders. Brian will discuss the details of our capital allocation strategy further in his prepared remarks.

Despite strong bookings and cash flow in the fourth quarter, our overall financial results were well below our expectations. For the fourth quarter of 2013, we delivered $1.7 billion of revenue, $27 million of net income attributable to KBR, and $0.18 of earnings per share fully diluted share. The earnings for the quarter were less than anticipated for a number of reasons.

While provisional acceptance was achieved on a major LNG contract, negotiations related to the final closeout continue and have not yet concluded in the favorable settlement as we had anticipated. This was a significant headwind to our quarterly earnings. However, we remain optimistic about our chances to successfully close this project.

Additionally, as part of our closeout activities on the project, we recorded a $17-million pretax non-cash charge associated with foreign currency accounting which occurred over the life of the project, and an additional $20 million pretax charge for increased cost due to delays in project commissioning, project taxes, and other items. With provisional acceptance achieved, we remain optimistic about successfully closing out the project in 2014.

Although the timing and amounts of any favorable closeouts remain uncertain, we believe this closeout could yield between zero and $0.27 per share to earnings, if and when realized. This closeout is not included in our 2014 earnings guidance.

We also saw headwinds in the quarter resulting from a number of discrete items, including $13 million in legal contingencies, covering an expected settlement related to legacy FCPA issues with the African Development Bank and other legal disputes; $13 million in severance and other personnel related costs associate with continued efforts to rightsize our organization; and approximately $16 million non-cash impact related to a reduction in the percentage of completion on the Ichthys LNG project due to an increase in the estimated cost to complete the project; an additional project closeout gain that will not occur as anticipated; and finally, a higher than expected tax rate resulting primarily from a valuation allowance taken against certain US state tax loss carryforwards during the quarter. Lastly, our markets remain very competitive, and some of the awards and work we expected in the quarter did not materialize as these anticipated project awards were delayed, canceled, or lost, which also impacted our quarterly results and our outlook for 2014.

Turning to full-year 2013, net income attributable to KBR increased to $229 million, from $144 million in 2012. We generated $290 million in operating cash flow, as compared to $142 million in 2012.

And the 2013 operating cash flow amount includes the one-time payment of $108 million in performance bonds on an ongoing dispute for a long completed project in Mexico, as well as the cash funding for the series of projects where provisions were taken in the fourth quarter of 2012. We continue to believe that payment on the performance bonds and related claims will be recovered in the future, but the amounts and timing remain uncertain.

2013 performance was driven by our Gas Monetization business, which generated the highest revenue of $2.2 billion and gross profit of $324 million. Hydrocarbons also had a strong year, with revenues increasing 18% from 2012 to approximately $1.5 billion, led by an increasing number of downstream projects such as ammonia, which are taking advantage of abundant natural gas, particularly in North America. However, the mix of projects has trended more toward longer-term EPC projects at lower average margins, and therefore, gross profit for this segment was relatively flat when compared with 2012.

The business volume in our Infrastructure, Government, and Power segment declined in 2013, with revenue approximating $1.5 billion, as compared to $1.8 billion in 2012. Government expenditures and customer investments in mining and infrastructure projects remain slow. Gross profit for the segment increased to $65 million, from $20 million, as the significant job losses on two projects in 2012 did not recur in 2013.

In our Services segment, business was strong in 2013, with revenue increasing 28%, to $2.1 billion, primarily driven by increased activity related to oil sands-related projects in Canada. Gross profit was also higher on increased activity, and also as a result of charges in 2012 taken on three projects that did not recur in 2013.

Looking forward to 2014, our earnings-per-share guidance is between $1.75 and $2.10 per fully diluted share. This guidance does not include any contributions from the project closeout mentioned earlier. In the near term, we continue to see a highly-competitive marketplace and an absence of very large EPC contract awards for new LNG plants in 2014.

As we've previously discussed, we are also seeing a shift in our business to more EPC work, such as the Dyno Nobel project, which tends to have longer dated contracts and near-term lower margins than pure book-and-burn services were. The cancellation of a gas-to-liquids project and the loss of an LNG project are also reflected in our 2014 guidance.

However, we see a number of excellent opportunities in key strategic markets, with substantial work to execute on existing projects for our customers, and with the addition of new work in key strategic areas, such as Gas Monetization, oil and gas, downstream technology services, and services supporting the oil and gas area, as well as the international government, defense, and support services business.

Now, I'd like to address each of our business groups and opportunities we see in more detail. At Gas Monetization, while we expect to see an active EPC bidding environment this year, we don't see customers reaching final investment decision on any mega-LNG projects in 2014. We see excellent opportunities for KBR on these projects when they move forward and intend to remain very active in the space.

We continue to execute well on our two major LNG projects, Gorgon and Ichthys, and expect strong execution through 2014, which will help to fuel earnings. Additionally, we continue to see a robust pipeline of prospects for KBR in 2014 and beyond, where we believe we will be successful, consistent with our leadership position in the Gas Monetization space. We are actively pursuing five pre-FEEDs across the globe, from Africa to Eurasia to North America.

We also anticipate working on two FEEDs, one in North America and one in Asia, one of which we believe will be completed in 2014, the other in mid-2015. We're also are working with Anadarko on the Mozambique LNG project by providing EPCM support services for the early works on the project.

With respect to EPC bids, we expect to provide EPC pricing and two facilities in 2014, both greenfield LNG projects in Canada and the US, and EPC pricing on an Asian brownfield LNG facility in mid 2015. Additionally, we continue to look for opportunities to fortify strong relationships with our key customers.

We are pursuing two ongoing alliances with Shell and BG for engineering work, feasibility studies, pre-FEEDs, and FEEDs. These alliances could allow us to capture additional opportunities relative to upcoming projects.

In Hydrocarbons, we're focused on executing on the ammonia and petrochemical work in both downstream and technology that we've already won. We're also focused on continuing to win new work and to building strong backlog based on the industrial renaissance in the US driven by low shale gas prices. We see strong opportunities for growth in Hydrocarbons and expect a book-to-bill of greater than 1 for 2014.

Downstream activity continues to be robust, and we expect to win our fair share of work in this market in the coming year. We are pursuing a number of multi-$100-million awards that we believe could reach FID in 2014. We are also seeing a high volume of sub-$100-million prospects where we think we have a good opportunity to win work and further expand the portfolio.

We also believe 2014 will be a good year for both technology and the oil and gas businesses as we see a strong pipeline of prospects ahead. A strong suite of technologies spanning a wide variety of markets positions KBR well to continue on a strong growth trajectory with particular strength in the ammonia and fertilizer spaces. We were recently awarded onshore and offshore EPC work for the Shah Deniz 2 project when it reached FID in the fourth quarter, and look forward to continuing our execution at a healthy pace on this project.

We're also are excited about the progress we're seeing on the large-scale FLNG projects, and are actively preparing FEED and an EPC bid on one project. We also are positioning ourselves well in a number of other early-stage FLNG projects.

We're also seeing increased activity in the Gulf of Mexico, including our work for BP on their Mad Dog Phase 2 project, which was referenced in today's Upstream publication. We see several pre-FEED and FEED project opportunities for 2014, setting in for larger-scale EPC and detailed design work to move forward in 2015.

At Services, we're focused on executing on the substantial work we've won over the past two years, primarily in the Canadian oil sands. We continue to see a strong demand for oil sands-related work as well as substantial opportunities for natural gas, mining, potash, and SAGD projects in Canada.

At IGP, we're seeing opportunities for growth in both our Power business and our IGD and SS business. We continue to execute on our as SWA and get EPC projects, and as we discussed on our Q3 earnings call, we received a limited notice to proceed on a 600-megawatt, $500-million Combined Cycle power project for an unspecified customer, and we expect to fully book the balance of this project into backlog in the middle of 2014, when all final permits and approvals are received by our customer. We continue to see a good bidding environment for both pollution control and Combined Cycle projects, and we are building a solid win rate on these projects.

At IGDSS, we are continuing our efforts to diversify this business in anticipation of the Afghanistan activity winddown and completion of the Allenby & Connaught construction project. We continue to build and develop relationships where our core expertise can be best leveraged.

We are excited about the number of new opportunities developing for outsourcing opportunities, both at the Ministry of Defense and with the local police forces in the UK, through public-private partnerships in the UK and Australia, camp support in the minerals market, and potential emerging opportunities in Libya. We think this diversification will yield good results for us in 2014 and beyond.

Now, I'd like to turn the call over to Brian to discuss a few of the financial items and to cover our capital allocation strategy in greater detail. Brian?

Thanks, Bill, and good morning, everyone. To begin, I'd like to discuss a few changes that we've made to our disclosure, and that's based on the feedback that I've received from my recent discussions with investors.

First, we've changed some of the captions in our financial statements to more closely conform to industry standards. On the income statement, we added a gross profit line and moved equity and earnings of unconsolidated revenues out of total revenues. On the balance sheet, we change descriptions on a number of captions and are now using industry terms; such as cost and estimated earnings in excess of billings, the so-called CIE, instead of unbilled; and also using billings in excess of costs and estimated earnings, so-called the BIE, instead of advanced billings.

We also added a new caption called claims and accounts receivable. This caption contains the items related to claims with customers that we believe are collectible, but where the timing is uncertain collection is likely to extend beyond 12 months. The key items included here are the Pemex arbitration award, and $226 million in claims receivable for costs incurred under various US contracts where there are either disputes or where the costs exceed the government's funded amount.

We also added additional disclosure around our cash balance and where the cash actually resides. We trust these changes will make it easier for investors to better understand our financial statements, and as always, we appreciate any additional feedback you may have.

Moving onto the details of our cash, as of 12/31, we had $1.1 billion in cash and cash equivalents. Of that amount, $69 million is held by consolidated joint ventures for future use by those entities. Of the remaining balance, $355 million is held by our domestic US entities, and $675 million is held by our international subsidiaries. The domestic cash is used largely to support the daily obligations of the US entities and to fund our general corporate needs, such as funding our new ERP system, the payment of dividends to shareholders, and repurchases of our outstanding common stock.

The international cash may also be available for general corporate needs, but prior to any repatriation, the cash may be subject to local restrictions, such as capital adequacy requirements and obligations incurred in the normal course of business by those foreign entities. Additionally, any cash repatriated to the US may become subject to US income taxes.

An example of one of the significant obligations of the international entities relates to our UK pension plan. You will note in the 10-K, our under-funded UK pension obligation has increased by nearly $100 million from last year due to a decline in the discount rate and an increase in expected inflation rate.

Now, I'd like to move on to discuss our capital allocation strategy in a little bit more detail than outlined in the press release. We remain confident in the future of KBR and believe we are in the right markets, working on the right projects, and pursuing the right prospects. As a result, we believe we will continue to generate strong free cash flow.

We believe we have been good stewards of the Company's cash and have been active in returning capital to shareholders. Since 2007, KBR has distributed approximately $828 million to shareholders in the form of dividends and share repurchases.

However, during 2012 and 2013, the amount of capital return to shareholders declined, largely because our US cash balances were significantly lower than in the past. As our logistics work supporting our troops in Iraq and Afghanistan decreased, our domestic revenue in the corresponding cash flow also declined.

Over the same period of time, we've ramped up a number of the mega-LNG projects overseas, which resulted in a fundamental shift of us generating less US cash and more international cash. As we see work moving back to North America, driven largely by the favorable project economics originating from an abundance of natural gas, we anticipate our US cash position will continue to improve. However, we are also looking at ways to repatriate foreign cash to the US in a tax-efficient manner.

The capital allocation strategy approved by the Board has three primary objectives. First, to pursue a limited number of target acquisitions that will enhance our technology portfolio. Our view is KBR is large enough and has a broad enough range of services to compete on an international basis without the need for a transformational M&A transaction.

Second, to return capital to shareholders on a regular basis by continuing to pay a dividend. And third, to return capital to shareholders via share repurchases of our common stock.

As part of this plan, the Board has authorized a new $350 million share buyback program. This authorization replaces and terminates a buyback program previously announced in 2011. We have not announced the specific timeframe to complete the repurchases, but we will provide regular updates as appropriate.

Lastly, I'd like to make one brief comment on the 2014 guidance. We expect earnings to be stronger in the second half of the year than in the first half of the year.

With that, I'd like to turn the call back over to Bill for his final remarks. Bill?

Thank you, Brian. In the fourth quarter, we had a solid book-to-bill of 1.1 and strong cash flow $209 million. We missed our expectations on a number of other fronts, which made for a very tough fourth quarter and a disappointing end to 2013. Looking to 2014 we continue to see KBR well positioned in key markets, particularly at Gas Monetization where we are well positioned on a number of future prospects.

We also believe we are well positioned to execute and win new work at Hydrocarbons, downstream technology, oil and gas, at Services with the oil sands-related work, and an IGP in both power, with Combined Cycle and pollution control, and at IGDSS with diversification strategy that is well under way. We are also pleased with the Board's approval of our capital allocation plans, which we believe will enable us to continue to provide strong returns to shareholders over time.

Finally, before turning the call over to questions, I am advised that the search for my successor at KBR is in full swing. The Search Committee of the KBR Board of Directors, along with their search firm, are working diligently on this assignment, and any further comment or announcement will come at the appropriate time.

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

(Operator Instructions)

John Rogers of D.A. Davidson.

Good morning. A couple of things. Maybe if you could just talk about -- especially on the Gas Monetization side. At this point, 2014 looks like it will just be running off your existing work, and 2015, we are hopeful that we will get some projects coming in? I'm just a little surprised, one, how much that market has deteriorated for you, and trying to get a gauge of when we might see a recovery there.

Well, I think, John, you have to look at the cycle of work that we go through, and we certainly had put a lot of effort into a gas-to-liquids project that did not go forward. That had been something we were working on and had targeted that with our Teams to fill an award position in 2013. And certainly, we were very disappointed with the news on Kitimat. So it's created a gap in our portfolio. Notwithstanding that gap, we are still pursuing the projects as they are developing in East Africa. We are still looking at the expansions at Tangguh. There's still opportunities for us in the British Columbia arena. We are under discussion on some projects in the US Gulf Coast, but we're very candidly taking a very objective approach, that we're still not seeing a lot of LNG contracts being executed with the project sponsors. This is just what we are being told by the project sponsors, and that has the underpinnings of the timing at which these projects are moving forward. There's still a lot of -- we think a lot of prospects out there, but I still see the market being reset based on getting the gas sales agreement and offtake agreements completed before they jump into a secondary activity, which is building the plant.

But a lot of those projects, Bill, I assume wouldn't, even if you'd won them, wouldn't of had a big impact on 2014. Yet, it looks like the margins -- and I don't know whether it's just Gas Mon or where else, are coming in a lot lower than what we were thinking a few quarters ago and relative to your original guidance for 2013.

Well, when we look at the Gas Monetization, we're looking now where fundamentally, the Escravos, where we had negligible contributions, and speak to where we have had contributions over time, have wound their way out of the portfolio. But for the closeout activities we referenced in the comments, Gorgon we think will be fairly steady during 2014, along historical lines. We will see how that project continues to evolve as the subcontractors perform and make their progress on the site. Ichthys continues to ramp up in terms of our activity. We've always said our roles were going to be a little bit back-end loaded in terms of the fabrication management and construction management.

We also believe that some of the headwinds we saw in the fourth quarter, they're going to work themselves out as the project scopes expands and the customer addresses some of the increasing costs that we are seeing and that are inevitable -- turning out to be an inevitable factor on all the Australian-based projects. So for us, those are still going forward smartly. It's really what's the next wave.

And as we had looked at our work and our Teams and where we were spending our time, we had some pretty good expectations of work, both on the GTL project that is not going forward and the Kitimat project, which we were not successful in continuing our role as the project leader on the downstream phase of that product project, made us change from Apache to Chevron. It's reloading the portfolio and taking the Teams that we had designated for both of the two aforementioned projects and making them available for discussions with customers, which are projects which we see being, perhaps, later in terms of their financial impact into our 2014 earnings than we had hoped with the others we are looking at even a quarter ago.

John, this is Brian. Let me maybe help a little bit on the margin question as well. Just to make sure we're all thinking about this the same way, if you refer to the press release, the $17-million charge and the $20-million increase in cost, as well is the African Development Bank charge, they are all in the Gas Monetization segment. So if you just look at the raw numbers without factoring in those specific items, yes, the margins look a little bit lower than the underlying business really is.

And the Ichthys, percent complete reversal, too. That also was against the Gas Mon segment.

That's correct.

Thank you. I'll get back in queue.

Jamie Cook with Credit Suisse.

Sorry, we've got to switch back to the guidance again, Brian or Bill. If you just look at what you guys disclosed in your 10-K, you have over $14 billion in backlog. You said you'll burn through about half that, which implies at least $7 billion. I'm just trying to understand what's embedded in your guidance, Brian, because even if you just take that $7 billion, in the implied margins for the business, to get your guidance, they're pretty sub par in my opinion. Can you just help me understand? You assume just the $7 billion? Do we assume you're going to get incremental work? And why are the margins are so low? Is it mix, or do you not like what you see within the backlog? And then also, Brian, if you could help on -- is it tax? And why is the first half going to be weaker than the second half?

Jamie, let me address the first part of your question. A lot of the issues we are seeing is mix issues. If you look at the Dyno Nobel work, that's a four-year-type contract. Our profits are recognized on percentage of completion basis, and so as we see projects like that ramping up, you are getting less near-term benefit out of them. The earnings will be there, and they'll be longer term, but it's certainly not delivering the impact that you would typically see when you are doing more engineering study work.

We've also -- we look at the mix of work. We had a large award with DuPont on the maintenance business last year is a great win for us, great positioning. It's led to further EPC work with DuPont, but it's also -- that's lower-margin work, too, in terms of -- but the volumes are much higher. So we're dealing with a little bit the transition of selling work, and as we are working it off, we're working up a lot of EPC work that just doesn't have the near-term margin, and that's really the explanation for the guidance as it relates to the burn off of the backlog. I will let Brian make some comments on that, as well, in addition to the tax point.

Yes, and I'd add, Jamie, that when you're looking at -- when you're thinking about volume, I would suggest you think about a volume increase, as Bill has been alluding to on this call as well as on the prior third-quarter call. So you'll see volumes pick up, but because of the nature of the more EPC work, you may see a little bit of compression on the actual margin. Moving on to taxes, the tax rate was a little higher than normal in the fourth quarter. We would expect the tax rate for the year, 2014, to be more in line with our historic levels, so a little bit down from the fourth quarter, but in line with what you've seen in prior periods.

And then you didn't address first half versus second half, so if you could address that. Then in terms of potential, Brian, I understand your commenting, you want to put out probably a conservative guide. I get that, but can you give me some clarification on whether you assume you do anything on the share repurchase? I'm assuming that's not in your numbers. The other part of it is, the closeouts on the LNG projects, when you'll expect -- why did you -- why are you lowering your assumptions from $0.00 to $0.27 versus you thought you'd get $0.36, and then when we'll hear about timing on that?

Okay. Let me take them and maybe in reverse order. Why did we lower the guidance, or why did we lower our expectations on the closeouts? As you work through the process and more information becomes available, we just updated the numbers. So we think $0.00 to $0.27 on one particular project is unchanged. There really had been potential upside on another project that we're not as confident of achieving, so we've dropped our thinking on the total value potential on these closeouts.

So the $0.00 to $0.27 is two projects or one, sorry.

One.

Okay.

One project.

Okay.

But there were two projects in the mix -- or there are two projects in the mix for closeout. However, the second project, we are not as optimistic at achieving some incentive or some upside potential on that project.

More specifically, we had certain rights to a project where we had taken some significant provisions to get back to a certain position. However, in the discussions with the customer on that, the customer cited very significant cost growth in the ultimate conclusion of that project. For the sake of a broader customer relationship, we made the decision not to force that issue, and instead, just close out the project and certainly not get into a heated debate regarding the entitlement of that upside. So that was the decision that we made, and that's why that -- over the fourth quarter, that discussion led to us not achieving that upside, and why we don't believe that upside will be achieved by KBR.

Coming back to some your other questions, Jamie, the first half versus the second half. I thought Bill try to address that in his remarks in that you have the EPC projects ramping up, so you're going to get more towards the back end rather than the first half of the year. Regarding the share buyback program in the guidance, there is an assumption for some share buyback to be in the guidance, but we are still waiting to see how we roll out the share buyback, what vehicle we use for that. As you know, on the buyback, there are different ways to accomplish that, open market, some accelerated programs, tender offers, et cetera. So we haven't announced anything about how we are going to execute the share buyback. I will leave it at that there is some share buyback assumed in that guidance, but we will give you more updates as we move along with the program.

All right. Thanks. I will get back in queue.

Jerry Revich of Goldman Sachs.

Brian, can you talk about the ERP spending outlook beyond 2014 as you take ownership of that process? And then also, just talk about the opportunity to repatriate cash to the US you mentioned in your prepared remarks, some additional disclosures, and I'm wondering if you could flush out for us where you are in the process considering how to get that cash back into the US for buybacks?

Okay. Regarding the ERP, this will be a heavy year for the ERP. 2015 will drop a bit from 2014, and by then, we'll have rolled out the majority of the program. So you're really looking at 2014 and 2015 for ERP spend, with 2014 being higher of the two. Regarding taxes, we're looking at a number of vehicles to bring back -- bring back cash -- excuse me, in a tax efficient manner. We have several ideas, and I'm highly confident that we'll be able to fund the share buyback plan with existing cash, as well is the cash that we expect to generate over the next year or so, or 18 months.

When you take a step back, one of the things we're looking at, the cash tax impact varies by jurisdiction. So the majority of our cash tends to be in Australia, the UK, and in Canada. We will look to bring back cash in the most efficient manner that we can. Some we can do immediately. Some may take a little bit more time for tax planning purposes. But I don't think, at this point in time, we'll have any problems in funding the plans that we announced earlier today, or yesterday, I should say.

Okay. Brian, just a clarification on the ERP system relative to the spend in 2014. What do you view as normalized, and how much lower do you expect 2015 versus 2014, just on the pure ERP spend?

I'm not sure I understand the question when you say normalized.

You are rolling it out, so you mentioned you are rolling it out, so your costs are elevated in 2014. So once you've completed the rollout, what do you view as the long-term ERP spending?

The normal long-term spending should be less than what we've been doing on an ongoing basis. What we've been trying to do is carve out the unusual or the one-time spends that will go away once the ERP program is completed. So once we get through 2015, I think we will have our normal spend that you've been seeing, or less.

More specifically, Jerry, we're still run the business on the existing -- largely on the existing ERP system. And as Brian was saying, we've got a whole separate Team that's developing and now implementing the ERP's Team, and we expect to see that Team go away and resume more towards historical run rates of our overhead.

Okay. Lastly, Bill, can you talk about the chemicals opportunities in the US? Looks like one of your customers has received board approval for a sizable ammonia plant. Can you give us an update on your expectations for ammonia order cadence and ethylene projects that you're pursuing in the US?

Yes, I think we're -- I'll just comment broadly about the hydrocarbons business, of which technology and downstream are two of the three legs of that stool. We're very optimistic about that business continuing to grow. Our expectation is backlog in the hydrocarbons space will increase during 2014, we're -- don't want to comment on any specific project, but overall, we feel really good about what's in front of us in hydrocarbons.

Thank you.

Steven Fisher of UBS.

I think investors are trying to assess whether 2014 is really a trough here. I know it's hard to say at this point. But just wondering what things you can do this year to support earnings growth as you look out into 2015. I know you said just now that ERP is going to be down a little bit. What can you do this year to support earnings growth, and are there any other tailwinds that you already know of?

I think there's a lot of optimism around the shop here. If you look at the -- in our oil and gas business, there was some mention about KBR related to BP's Mad Dog Phase 2 project. We are seeing a number of FLNG prospects on the horizon, including one where we are preparing the final FEED bid and EPC bid. We're pleased with the award from BP in the Caspian, but we are also told that if you look at the history of work we've done at Shah Deniz and ACG, that given what BP is hoping to do in the future, that we are probably not halfway through that whole program with them. So oil and gas has got a really good prospect list ahead of them beyond even the couple opportunities I just cited.

In downstream, we're seeing US chemicals, ammonia, some international refineries that we are pursuing. They all look to be fairly promising, and I think our competitive position on these projects is very good. We're expecting technology to continue to grow. They had a great sales year last year. We'll see some contribution this year, but we'll get largely inventorying some earnings for future years as these technologies come online and we are able to recognize all of the job income from those technology sales.

We talked about power. We believe we've got one in the bag on that major Combined Cycle project that will hit backlog in second quarter. That's continuing to have a good cadence of awards in pollution control and Combined Cycle projects for us. At IGDSS, we've got a number of things we are looking at, extensions of the Allenby & Connaught project, some MOD outsourcings that we expect to see in the middle of the year, some results from that where we have bids in. There's some public-private partnerships that we're very, very favorably positioned on and are working through the mechanisms there.

Canada, we're expecting to see continued growth, largely in the oil sands, and a rebound in our US construction business. We've already talked extensively about the reloading of the prospects in Gas Mon. So I think there's a lot of good things going on here that will portend to see stronger earnings in 2015, and really, it's up to the Teams here to be able to execute these prospects. But we do have a lot of optimism across the portfolio for what the business can do.

I guess I was wondering more within your control, also, in terms of cost restructuring and things along those lines.

Well, Steve. I think you know me well enough that that's always an area of focus for me. We've done some of that already since I've been here, and it was underway before I arrived. And it will continue to be an area of focus as we move forward. We made comments about some of the charges we took, about adjusting the size of our workforce to match the workload. Those activities our normal in this business. So yes, that's certainly is part of the mix, as well.

Okay. If I could just ask a quick question on Ichthys in terms of the trajectory there. Is 2015 expected to be steady with 2014? And on the scope of your own work, when does that occur? I think you had some fixed-price elements of that at risk. When do get beyond that risk period?

Well, if you think about Ichthys, we are still ramping up, and we should see improvements if you just think about normal percentage completion taking place in the second half of 2014 and into 2015 and 2016. We also will see a higher degree of Services revenue from the services we'll be performing in the fab yards as well as on-site construction management on that. That will also give increased momentum on Ichthys going forward.

As we look at the fixed-price elements, we have had significant discussion about that in prior calls, where while you've got contractually a large amount of fixed price in our backlog, that the open positions really are not that material for a company of our size. What we saw on the cost estimates, we think the costs are going up on some of the bids we are getting back. We have a certain discipline we follow for accounting as costs get back and we go through our check estimate process, that it does affect the percentage of completion, which we are doing on a cost-to-cost basis. It hasn't cost us earnings over the life of the project. In fact, we probably will be able to get some additional margins through the negotiations of the change orders on the increased cost.

So as we look at things, we are not that worried about where we stand from the management of the fixed price exposure of the project, particularly given some of the fairly reasonable debt bands where we are eating some cost, if we are to exceed these budgets, after which we pick up on a reimbursable of our cost perspectives. So nothing has change from our perspective on the fixed price. The over all Ichthys news is it's more profitable for us over the life of the project, but we had to take the hit because of the cost-to-cost accounting in the fourth quarter.

Andrew Kaplowitz of Barclays.

Bill or Brian, can you give us some more color on the level of utilization in your business? Is your labor cost absorption in 2014 going to be similar or actually worse than 2013? I know, Brian, you said the $13 million you took in cost take-out, I know you mentioned that. But is there more you can do? Clearly, the outlook in your Gas Monetization business has changed here. Can you work on that more here over the next two years? But I'm really curious about that labor cost absorption number.

Just to maybe give you some color on the labor cost absorption, Andy, it's the cost of resources we have in the pool, and we're being very good and aggressive about the variable cost or the personnel related cost in terms of trimming that. However, we are still working through a little bit more slowly the implications of real estate that's not being used. And so our ability to manage that doesn't turn on a dime. It turns much more slowly, and we're working to take the steps to minimize the unused real estate costs that we have in the portfolio, but that's going to take a little bit of time.

Yes, and a follow-on on Bill's comments. That's exactly the point. The utilization, to answer your question, is in many places quite high. But to Bill's point, if you have excess office space or other fixed-type costs, even although you have the workforce fully utilized, there isn't the volume to absorb all of that overhead. So when I was commenting earlier on the cost side to Steve's question, that's exactly what I was thinking. We do have opportunities on more of the fixed cost. We are looking at that. That is a goal for 2014. And to answer your specific question, we would believe the labor cost under-absorption will be better in 2014 than it was in 2013.

The answer to your question (multiple speakers) -- our chargeabilites have remained very good for the people we have in the Company.

Got you. But just to pin you down a little more, Brian, just marginally better, or a lot better? Better is -- you did negative 60 or around that in 2013. There's a big difference between negative 30 and negative 50, you know what I'm saying?

Andy, I'm not going to be more specific, but, yes. Yes is the answer. It will be better.

Bill, maybe just to push you a little bit on the future --p the forward outlook here. You've grown backlog over the last few quarters here, without big Gas Monetization projects. So as you look at 2014, I know you sound confident that you can grow Hydrocarbons' backlog. But if you look at the whole Company, how do you feel about backlog for the whole Company? Is there a chance you could grow backlog even though we know Gas Monetization is going to go down, because that gets us more excited that 2015 can be up and not down?

There's a lot of things. I think the aperture of how things could go is a pretty wide range, as we've tried to pin down our folks. We certainly have been, I think, fairly transparent of where we see the impact on backlog and the work off of the Gas Mon backlog over the year. Yes, I think it's a much more optimistic picture in the rest of the portfolio is the growth opportunities we have. Could be pretty powerful. But as we look at things, we're trying to risk adjust them. If we hit a great string of luck, you could see a much better backlog position than what we're signaling right now, but we're trying to stay within the discipline of our rated go gets on that. And it's going to be tough for us to see much backlog contribution coming out of Gas Mon this year, but the rest of the Company looks pretty good from where we sit.

Can ask you guys one quick clarification on the services business? You're guiding to weaker earnings in the first half of 2014 than the second half. Services revenue was good, but then it was lower in 4Q than 3Q, even though the backlog is up 25%. Is there weather impact at all in that business more in the first half of the year?

I think we've made some comments previously, Andy, about our maintenance vessels down in Mexico with MMM. We've seen a higher percentage of the time on those vessels being out of contract, which does gives us headwinds on the margins in Services, and we're working hard to get them back on contract. Clearly, there's a lot of change going on in Mexico, and Pemex in particular. Some days we feel like we are pushing a rope on it. But we remain optimistic that we can get those boats under contract and get a much better performance out of that business than the second half of the year, certainly compared to where we see the position of that business in the first half. I think that's probably the biggest impact, or the most visible impact here in terms of what's gone on in Services.

Tahira Afzal of KeyBanc.

My first question is in regards to the technologies you could be looking to pursue as acquisitions. Are you looking for something on the mainstream side? On the ethylene, polyethylene side? Are you looking at second generative products on the polypropylene side? Or are you going for something even more in a way to maybe go through (inaudible) and all? Anything you can provide, that actually would be helpful.

Well, we have a -- our distribution network is established, and what we are trying to focus on is to fill in adjacencies to our existing technologies, to be able to expand our offering, to offer multiple technologies as opposed to singular technologies. So that's our first avenue. If we have an opportunity to look at something that's not an adjacency, we certainly will consider it. For us, as we look at the distribution cost of that technology, we believe largely, the technologies that aren't adjacencies will still be sold to the same customer base that we're calling on right now. So it's a pretty wide spectrum of what we're considering, but with a stated preference for us to look for adjacencies where we think there's some benefit of providing a broader value package than we would selling one offs.

Got it. And not to belabor the point, but I'd think even Andy was probably asking the right question because there clearly is a slight lag of gas (inaudible) in the near term. If you are looking at 2015, and let's say we were at this point next year, and your backlog is flat, will the progression of profit recognition as you describe it for some of the larger projects, which really doesn't contribute that much (inaudible), and the potential of even better under-absorption levels this year. Would that be sufficient for you to see a 2013 up year? Or would you need something much more than that?

That's a pretty wide ranging question. As Brian has commented, we do see a bit of roll-off on the ERP spend. We're continuing to attack cost, and as we talked about, there is some time it takes to work through unused real estate cost. If we were sitting with backlog where it is at the same level today, as we'd see a year from now, it depends on the mix and where it is and how we sell it. We think that the work that we're going to be able to bring into the portfolio in Hydrocarbons will be at consistent Hydrocarbon margins, which is good. But again, it's dependent on the mix, whether EPC or if it's Services based. We think that some of the strategies we put in place several years ago about project delivery are driving that business into EPC, where we expect to see larger net job income on these projects, but it's going to be recognized over longer periods of time. I will just use how we contrast that with the margins we've done on topsides engineering design versus project delivery. You probably see multiples of job a income, but probably at a -- just to be very imprecise in my number, half the job income margin.

So it gets back to mix. We feel pretty good about where the prospects are keying up, and we think that if we do execute as to what our plans are, that we'll continue to see KBR grow and get back to a growth platform that we've had. We've pretty well exhausted out the shrinkage in the North American government business. We expect to see a little bit more in IGDSS in Afghanistan. But those margins have come down on the re-bids. So it's really too early for us to get in and look at 2015. But if we hit the awards, a lot of things could spin around, including the LCA, if we're able to fully absorb the real estate cost better than 're expecting to do in 2014.

And Tahira, I would add that we are looking to grow all the businesses in 2014 in terms of backlog and revenues, with the exception of the Gas Monetization. As we said, it's so lumpy that if you don't get an EPC award in a given year, you are always going to burn off some of the backlog. So we shouldn't discount the opportunities that exist in the other businesses. I'm not sure if that has been understood in your question.

Vishal Shah of Deutsche Bank.

This is Susie Min for Shaw. Thanks for taking my question. I know some of your competitors have been awarded some of these larger LNG products as well as ethylene projects, which I know you guys don't compete in. But how does that position you for maybe projects that customers may not have considered you guys for but may be concerned about these other E&C players to have the capacity to do it? Do see any change? Or does that position you better? And then I have a follow-up question.

I think it honestly positions us better. We had A Teams that we had put on both -- we had an A Team that was working on the Kitimat project, that's now available, and we had an A Team that was on the GTL project that is not going forward. So I would say, as we look at the next projects that are coming up, as customers are considering the project teams, which we think is one of the more important aspects of how you make contractor selections, that we're going to be offering really good teams, and we believe that those customers -- those competitors of ours who have sold work will probably be consuming some of their better people on those projects that they've won. We think that gives us, on a relative basis, a stronger offering than we believe our customers can make.

Okay. Great. Just within the Hydrocarbons margin profile, I know in the past, you guys have said Gas Monetization margins should trend closer to Hydrocarbons as some of your project work that is higher-single-digit work stops. So how can I think about maybe both of those margin profiles? I know we don't really have anything new on Gas Mon until maybe 2015 timeframe. But to focus more on the Hydrocarbons business, between the mix of technology as well as through the new ammonia projects you guys have booked, how should we think about that margin profile? Thanks.

Well, to come back to Brian's points on -- he made earlier, I think it was to John. We took a lot of -- had a lot of headwind in Gas Mon this quarter on Ichthys and Skikda and the other costs we had. So the Gas Mon margin should -- particularly with the roll-off of Escravos and Skikda over the year, should be pretty good for us as these lower-margin consolidated projects are no longer having as material an impact in our earnings as they have historically. In Hydrocarbons, if we're pursuing the same type of work, the margins should be there. But as we look at a project like Dyno Nobel, where as we cost these things internally, with respect to our engineering, we are still making the same margin in engineering on -- intellectually on Dyno Nobel an EPC project as we are on a traditional engineering-only project.

But what happens is, is you make a far smaller margin on procurement, a lesser margin on construction labor. So as you take the project and you average the margins across all the different components, and engineering is, let's say, 10% of that, you are coming up with an EPC award that is appropriately priced at the job income margin that's far less than you do on a Services basis. So as we are looking at these and rolling these into the percentage of completion, you are seeing a lot of margin compression, and we expect to see a continued margin compression on the Hydrocarbons business related to the mix of work, but overall, as you look at the life of the project, and over a multi-year period, it's going to be a much more robust period of earnings for us than we would've had had we stayed in our Services-only model.

All right. Okay. Thank you.

Brian Konigsberg of Vertical Research.

Most of my questions have been asked. But maybe just touch on the commentary with the DOJ and the complaints about kickbacks. How material might that be? Any commentary you could provide around timing of discussions or potential litigation and potential size of the risk?

I would just say that we have fully disclosed our positions on those in the K. I would say that as we talked about in the release, we didn't see anything from our side that was new within the lawsuit filed by the Department of Justice. There was a lot of rehashing of things that we already knew. It perhaps was as much a tactic by the Department of Justice to get something out to -- maybe in their view to pressure us, but as you've read our K and you've listened to us over the years, we've got a lot of stuff going on, and so we don't spook easily when they file a lawsuit.

We feel that we've been a model citizen in terms of our conduct over there. We report stuff when we are aware of it. We terminate people when they get off the reservation. We make restitution where it's appropriate, and we remain very proud, not only of the services that we've provided to the men and women who serve the Armed Forces, but we do so with the belief that we did it with the full intent and character required of any contractor performing services for the US government.

Now, as we move to the closeout and the inevitable issues that arise, not only in this case but others, there will be a debate. We've got a lot of things we're working on, in this just was one that came up. We actually were surprised it came up because we were very much in discussions with them. But the government chose to take that public, and so we've chosen to address it, but it really doesn't change our (inaudible) or cadence or belief about where we stand or regarding our positions on the closeout of LogCAP matters. We feel that we have a very robust discussion internally with our law department, with our accountants, with our auditors and other outside advisors regarding the provisions that we have on the balance sheet related to the risks. And we feel that we're appropriately provisioned for what we believe is the ultimate disposition of these matters. A long answer to say it was just another lawsuit from the DOJ.

And Brian, we also updated the disclosure that we have around all of these disputes, particularly the government ones in particular, that hopefully provides a little bit more clarity about both the cash exposure as well as the book exposure.

Actually, I still have to go through that section of the K. There are always a lot of numbers that are thrown around of that section. Can you maybe give us maybe a shortcut and quantify, as far as what -- how much of the (inaudible) are outstanding and what you're pursuing, where that stands right now? I know there's just a number of items in there. It's a little bit hard to put together.

Well, it is a lot of items in there, but maybe trying to get by with the easiest answer is, with all the review we do with our advisors, with our Management, with our Board, we think we've taken the appropriate positions on our balance sheet regarding these risks. And where we don't see a provision that's -- or we call out in the absence of a provision, we think we will ultimately prevail appropriately according to the accounting we do every quarter on that.

And Brian, you've got to go through them one by one because each one is a separate issue and stands on its own merits. So take a look at the disclosure, like I said because I think we've added some clarity to this issue in this latest version of the K.

Okay, that would be helpful. And then just lastly, just on pricing, I know maybe it's hard to be precise, and you might have to go market by market, but it does seem, just from your commentary, the large projects that you have been pursuing have been very competitive. Would you say that the [as-sold] or core margin on these projects have been declining? And maybe that is a reflection of your peers wanting to fill up capacity, but also the project owners being tighter and controls or cost controls. Maybe provide us a little color on that would be helpful.

I think you are seeing good healthy competition on the projects. And I think you're seeing it manifest itself not only in terms of margins, but also the risks that contractors are being asked to take on. It's a slightly different risk environment than we saw a couple of years ago. And we continue to have very open, transparent, and robust discussions regarding the appropriate risk allocations with our customers, particularly in a very dynamic and changing environment that we find ourselves in here in the US Gulf Coast.

At this time, I would like to turn the conference back over to Bill Utt for any additional or closing remarks.

I'd like to thank everybody for tuning in. We very much appreciate your questions on KBR. We hope we've had the good fortune to address your questions to the best extent that we could, and we look forward to following up with you over the coming days and weeks if you have any further questions regarding the 2013 10-K and annual results. Thanks, and have a great day.

This does conclude today's conference. We appreciate everyone's participation today.