KBR, Inc. (KBR) Q2 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the KBR's Second Quarter 2011 Earnings Conference, hosted by KBR. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Thanks, Tom. Good morning, and welcome to KBR's second quarter 2011 earnings conference call. Today's call is also being webcast, and a replay will be available on KBR's website for 7 days. The press release announcing the second quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, Executive Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance, financial position, backlog and other financial items. We will welcome questions after we complete our prepared remarks. Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements, reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31, 2010, KBR's quarterly reports on Form 10-Q and KBR's current reports on Form 8-K. Now I'll turn the call over to Mr. Bill Utt. Bill?

Thanks, Rob, and good morning, everyone. Overall, I'm pleased with KBR's continued strong financial performance this quarter. KBR's second quarter net revenue was in line with our expectations, and excluding the LogCAP project, is up 5% year-over-year. KBR's business unit income this quarter was up approximately 20% from the prior quarter and each of our business groups showed increases in business unit income of 15% or more compared to the prior quarter. As a result of our strong performance and our outlook for the remainder of 2011, we are raising our full year 2011 earnings per diluted share guidance to a range of $2.60 to $2.85 per share from the range provided earlier this year of $2.05 to $2.30 per share. This represents a 25% increase from the initial 2011 guidance we provided in January. This new guidance reflects KBR's stronger operating performance and expected lower 2011 effective tax rate as well as continued control of our general and administrative expenses. During the quarter, KBR's job income backlog increased 4% compared to the prior quarter while revenue backlog remained essentially flat. Compared to the prior year second quarter, job income backlog is up 12% despite our revenue backlog decline of 4%. KBR continues to work off the lower margin projects in our backlog, while successfully replacing this backlog with higher-margin projects. Compared to the sequential quarter, Hydrocarbons backlog was down approximately $269 million, primarily related to the general project work-off in the Gas Monetization and Oil & Gas business units. With the addition of the Jazan refinery FEED, work scope additions for the Lobito refinery project and the award of the Molycorp EPC project, Downstream backlog increased by $160 million. Technology backlog was up 24% sequentially, primarily related to several new ammonia projects. IGP's backlog was up $266 million led by the booking of the Solid Waste Authority project as well as work additions on the LogCAP III and IV projects. While services backlog declined $103 million from the first quarter, we believe we're announcing a turnaround emerging in this predominantly North American business. New award bookings this quarter are the highest since the end of 2009. And as of today, services has sold more new work year-to-date than was sold in all of 2010. We are very pleased with the positive evolutions we are seeing in new awards at services this year. I would like to now comment on the status of several KBR projects at our business units. For the Inpex Ichthys LNG project, KBR and our partners remain actively engaged in post-FEED and pre-FID activities and the open-book tender discussions continue to proceed towards a fourth quarter 2011 FID. For the Pluto LNG expansion project, KBR continues to receive post-FEED assignments and provide pre-FID services on the project. We note the continued increased cost and schedule delays on the Pluto 1 foundation project and continue to provide support to Woodside on this project on an as-needed basis. For the Kitimat LNG project, FEED activities and pre-FID site construction management services are progressing as planned, with FEED completion expected by year end. We continue to be advised that the owner expects to take the FID for the project during the first half of 2012. For the Browse LNG project, KBR expects to complete the bulk of the FEED work by the end of this year. The project currently remains on target for a 2012 FID. The fourth train at Gorgon has been awarded to KBR for pre-FEED work, and this work is currently underway. Finally, I'm pleased to announce that Anadarko has awarded KBR pre-FEED work for their grassroots LNG project in Mozambique. Work on this project has already started and is scheduled for completion by the end of 2011. In Oil & Gas, we have completed our design of the CLOV project off Angola and engineering work continues for the Jack/St. Malo and Big Foot projects for Chevron in the Gulf of Mexico. Under our global agreement with BP, we are executing detailed design for the Chirag Oil project, FEED work for the Chadanese 2 onshore and offshore projects and engineering for the HOD and South Arne projects in the North Sea. Finally, at GVA, the design for 8 FPSO hulls for Petrobras is progressing, and we recently completed FEED work for a semisubmersible drill rig for Statoil in the North Sea. At Downstream, we are also seeing increased opportunities in the Americas as evidenced by our recent KiOR and Molycorp EPC awards. For the Lobito refinery project, KBR continues to perform early-stage EPCM work, including the physical site design, the consolidation of multiple living camps and other work in preparation for the project's expected FID in late 2011. On the Ras Tanura Integrated Project, now known as the Sadara Chemical Company venture, FEED work remains on schedule for completion later this year, and in anticipation of the project's FID, KBR continues to provide coordinating PMC and pre-EPC support activities on the completed FEED envelopes as well as planning for additional support in KBR's design offices at the project site. On the Yanbu project, our design work is being completed on schedule and KBR's PMC team has begun to move to the site, while other KBR personnel remain deployed at EPC contractor offices. On the Jazan FEED and PMC refinery project, KBR continues to increase staffing in both London and Khobar, Saudi Arabia. KBR's Technology business unit continues to rapidly grow and had another solid quarter. Revenue increased 14% compared to the prior year second quarter and backlog was up 24% from the prior quarter. During the second quarter, technology announced an alliance agreement with Shell Global Solutions to market, sell and provide design packages for hydroprocessing technologies as well as the formation of a joint venture company in China, with Shaanxi Yanchang Petroleum Company to market, sell, deliver and support the Veba Combi Cracker technology under BP's collaboration agreement with BP. At our North American Government and Defense business unit, while our volume of work remains stable in Iraq, we continue to prepare for the possible ramp down of U.S. forces in late 2011. During the second quarter, KBR received approximately $566 million of funding to existing LogCAP task orders. LogCAP III remains a cost plus fixed fee contract and KBR expects to receive our final award fee under the LogCAP contract for the period September 10, 2010, through February 2011 during the third quarter. In late June, KBR was awarded a participation in the $3.8 billion CENTCOM multiple award task order contract to support design, build and construction projects throughout CENTCOM's 20-country area of responsibility. KBR has already been awarded its first task order under this MATOC for construction of military facilities at Bagram Air Base in Afghanistan. We anticipate a steady number of task orders being released within the next 60 days for projects ranging from $20 million to $100 million each. KBR was also awarded a contract for the construction of a dining facility at Lackland Air Force Base in San Antonio. For our Minerals business, Roberts & Schaefer was recently awarded EPC contracts by Seminole Electric Cooperative for a bottom ash and economizer ash handling system replacement project in Florida, and by Motiva, for the construction of a petroleum coker material handling system. We continue to see significant activity for Roberts & Schaefer in both Indonesia and India that I mentioned last quarter. On the infrastructure front, KBR received several awards for engineering and Project Management for Water projects in Australia and the U.S. Also in Australia, KBR was selected to provide engineering and design services for 3 coal seam gas pipelines to carry coal seam gas from the gas fields in Central Queensland to export facilities on Curtis Island. For the Services business unit, KBR has been awarded a large air-quality control project from a major Southeast U.S. utility company, which we expect to press release relatively soon. KBR will perform the installation of all equipment and associated piping, steel, ductwork, electrical, instrumentation and related construction work. This project presents an excellent opportunity for our U.S. construction group to continue to grow KBR's presence in the U.S. domestic power industry. As I mentioned earlier, services new awards this quarter are the highest since the end of 2009. And as of today, services has sold more new work year-to-date than was sold in all of 2010. Our Ventures business unit continues to provide solid results, benefiting from high-capacity factors and strong product pricing at the EBIC ammonia project, as well as positive income contributions from the Aspire and Fasttrax investments. Finally, as KBR continues to manage the growth in our business, resource center headcount at the end of the second quarter was up 6% compared to the prior year second quarter and up 2% from the March 2011 quarter. Now I'll turn the call over to Sue. And after Sue's comments, I will comment in more detail on the market outlook for our business before turning the call over to questions. Sue?

Thanks, Bill. Consolidated KBR revenue totaled $2.5 billion, a decline of $214 million or 8% from the prior year second quarter. As expected, LogCAP revenue decreased $300 million compared to the prior year second quarter. Positive revenue contributions included a 10% revenue increase from the Hydrocarbons group, led by Oil & Gas revenue up 29% followed by Technology, up 14% and Gas Monetization, up 10%. Infrastructure and Minerals revenue was up 105% compared to the prior year second quarter primarily related to the addition of project revenue related to the R&S acquisition and recently awarded projects. Consolidated operating income was $169 million in the second quarter of 2011, down $30 million or 15% compared to the second quarter of 2010, which included $60 million in LogCAP III award fees and a $36 million benefit from Yemen change orders. KBR operating income had a favorable comparison to the first quarter of 2011 of $144 million. Net income attributable to KBR for the second quarter of 2011 was $0.65 per diluted share compared to $0.66 per diluted share for the prior year second quarter. Let me share a few highlights from our business units. Gas Monetization had job income of $76 million for the second quarter, $12 million or 19% over the first quarter of 2011 and $7 million or 8% shorter the second quarter of 2010, which again included Yemen change orders of $36 million. Good progress on the Gorgon EPC project, a fee on new Escravos work and continuing work on the Browse FEED, Kitimat FEED and Statoil KEP contributed to the strong performance in Q2. Oil & Gas income of $30 million is up $6 million or 25% from Q1 2011 and up $17 million or 131% from the second quarter of 2010. Six new projects, CLOV, South Arne, Chadanese 2, HOD pre-FEED, Statoil and Engevix contributed to the strong performance along with Big Foot scope of work additions. There were also $4 million of charges related to the Barracuda project that were recorded in Q2 of 2010. North America Government Defense had job income of $51 million in the second quarter compared to $55 million in the first quarter of 2011 and $92 million in the second quarter of 2010. The first quarter had award fees of $16 million and the second quarter of 2010 had award fees of $60 million. Other changes are volume related with LogCAP revenues down $300 million as I mentioned earlier. We continue to expect LogCAP revenues to be between $1.6 million and $1.8 billion in 2011 and we anticipate receipt of our final award fee under LogCAP III in the third quarter. International Government and Defense had $33 million of job income in the second quarter compared to $17 million in the first quarter of 2011 and $22 million in the second quarter of 2010. Increases came from margin improvement on the Allenby and Connaught project, NAMSA Kandahar commenced service delivery as well as construction and construction management work at Camp Bastion in Afghanistan. Power and Industrial job income of $8 million is up $2 million or 33% from Q1 2011 and down $7 million or 47% from Q2 2010. Declines came from completion of the FWA refurbishment project and increases resulted from the mobilization of the new FWA expansion project in the planned Red Cliffs IGCC engineering project. The performance of our businesses continues to be strong as reflected in our operating results. General and administrative expenses for the second quarter of 2011 were $58 million or 2.4% of revenue. KBR continues to focus on and improve performance in G&A expenses. Our full year 2011 estimates for corporate G&A expenses are $215 million to $220 million. In the second quarter of 2011, our overall effective tax rate was 24%, which consisted of an operating effective tax rate of 28% and discrete tax items related to tax planning strategies and tax statutes. The lower operating rate provided $0.04 of EPS in the second quarter and discrete items provided $0.05 for a total of $0.09 in the second quarter. We did not release any reserves during the second quarter related to the Australian rail project. It is under receivership and we're evaluating those reserves. For the full year of 2011, we anticipate that our overall effective tax rate will be in the 22% to 24% range due to discrete items related to tax planning strategies and resolution of certain foreign tax matters, including issues concerning the Australian rail project. Our operating effective tax rate for the full year 2011 is now projected to be approximately 30%. Discrete tax items included in the 22% to 24% ETR estimates provide approximately $0.37 of earnings per diluted share benefit for 2011. Labor cost absorption income was $6 million in the second quarter compared to labor cost absorption income of $4 million in the second quarter of 2010. Labor cost absorption income improved primarily related to higher headcount in the labor resource pool as well as higher chargeability and utilization in several of our engineering offices. As Bill stated previously, our headcount in the labor resource pools at the end of the second quarter 2011 was up 6% compared to the prior year second quarter and up 2% from the March 2011 quarter. I'd like to discuss KBR's backlog in a bit more detail, building on Bill's earlier comments. The revenue backlog as of June 30, 2011, was approximately $12 billion, down 4% from a year ago and flat compared to the sequential quarter. $2.4 billion of new work added this quarter was offset by general project work-off or a book-to-bill ratio of 100%. Overall, the backlog portfolio mix at the end of the first quarter was 76% reimbursable and 24% fixed price, a slight mix change from the 80-20 we reported in the first quarter of 2011. The mix change reflects the award of the Solid Waste Authority project and lower reimbursable LogCAP backlog. Next I'll discuss our liquidity and balance sheet. Total cash provided by operating activities for the first 6 months of 2011 was $223 million compared to $432 million provided by operations for the first 6 months of 2010. Total cash used by operating activities in the second quarter of 2011 was approximately $2 million, primarily related to the timing of a $71 million collection related to the LogCAP contract, which was received on July 1, 2011, and also during the second quarter, we paid cash taxes of $18 million, which will be reimbursed in the future by our former parent and contributed approximately $8 million to our pension plans. The second quarter of 2010 benefited from strong collections in our Gas Monetization projects. At the end of June 2011, our balance sheet remains strong, with cash of approximately $712 million, which included $212 million associated with our consolidated joint ventures. The $712 million in cash, down $76 million compared to the sequential quarter also reflects a return to shareholders of $35 million for the repurchase of just under 1 million KBR shares and $8 million in dividends paid. We used $21 million for capital expenditures in the second quarter. Before turning the call over to Bill, I would like to reiterate that KBR's full year 2011 earnings per diluted share guidance is now in the $2.60 to $2.85 range, which reflects stronger operating performance and a lower 2011 effective tax rate for the potential further discrete items in the next 2 quarters. I mentioned this earlier. Also, we anticipate the full year 2011 corporate G&A expense to be in the $215 million to $220 million range. And now, I'll turn the call back over to Bill for his final remarks.

Thanks, Sue, and I'd now like to provide KBR's outlook for our businesses. Following my comments at the end of last quarter, KBR still believes that business activity will continue to remain stable in the Middle East. While not as active as we saw 3 to 4 years ago, we believe that continued capital spending remains stable in the hydrocarbons markets as well as infrastructure markets, particularly in Qatar. Further, we remain optimistic that spending will continue to increase in Iraq as that country continues to make progress in the rebuilding of its hydrocarbon and infrastructure markets. KBR also remains very bullish on Australia, particularly in the LNG and mining markets. We believe many of the attributes we saw in the Middle East 3 to 4 years ago are now beginning to emerge in Australia related to technical and construction labor constraints, the need to provide out-of-country resources and a general tightening of the regional capital projects supply chains. We believe announced projects will ultimately go forward, but there may be some delays with respect to the timing of their sanction. In the North American markets, we are seeing a continued strengthening in the industrial markets across the board. We believe owners are increasingly more confident and moving forward on projects and this should bode well for the continued strengthening of KBR's North American-based businesses. For our Government Support and Logistics businesses, we continue to await the final outcome of discussions between the U.S. and Iraqi governments concerning the status of U.S. forces in Iraq. The situation in Afghanistan looks a bit more stable, and we continue to be pleased with the new work we are winning with our government customers. [Operator Instructions] Thank you.

[Operator Instructions] We'll take our first question from Joe Ritchie with Goldman Sachs.

I guess, my first question on the comments that you made on your Services business, so just some clarification there. So it sounds like so far in July, you've booked over $500 million worth of work. And can you tell us a little bit about where you're seeing that work? I think, you mentioned that you're going to be performing the installation of some scrubber work at a Southeast utilities company. Can you just talk a little bit about what you're seeing in the trends in the Services business right now?

In services, Joe, we are -- we were just a bit -- at June 30, we were just shy in the new awards year-to-date compared to all of 2010. And with the recent award we've gotten this month with the contract signed, that puts us over the new award amount. We are seeing some recovery. We've talked about the size of projects previously, I think in some earlier calls. We talked, last year, that the size of projects was in the $25 million to $50 million range, which are -- maybe we can't differentiate ourselves as well from more local competitors, but now we're seeing larger projects going forward. We saw that on the Chevron Base Oil project. We're seeing this on the utility pollution control project and so we are seeing projects start moving forward. Even people are talking about some new-generation resources that for the last 2 or 3 years, people haven't been talking about. We're seeing in the consolidation of the shale plays, there's some opportunities for companies like KBR, as bigger entities come in or are looking at doing larger type in-field developments. Although, we've not been successful yet in any of those awards. We are seeing an increase in activity there. We see Canada starting to come back on a systematic basis with some new awards. Again, it's not where it was a couple years ago. But the discussions that we're having with folks, they're talking about growing their businesses and investing capital, now certainly to a much larger degree than we saw in 2010. So really across the board, we're seeing a number of areas that give us continued optimism of the rebound in the North American markets, which led to the comments I made in the prepared comments earlier today.

Okay, Bill. That's very helpful. I guess, just switching gears, 1 other question I had was on your margins in Gas Monetization, specifically. They were very strong this quarter as you start to ramp up work on Gorgon. Is this the run rate that we should be thinking about on the Gas Mon side over the next several quarters? Or how should we be thinking about that?

I think it was a really good quarter for Gas Mon. We had -- we talked a little bit about an Escravos change order that we got, which was unusual. But the way the change orders work, there is earnings on the change orders, while the rest of the project is being worked on a breakeven basis. We did have some benefits on Gorgon that were a little bit of some FX catch-up for us that benefited us a little bit on the top line, but then quickly unwound themselves in the minority interest. But overall, it was a really strong quarter in Gas Mon. And yes, I wouldn't -- I wouldn't say we can count on that going forward. But certainly, as we add some of these prospects in the backlog, I think, we can see this level of performance within our Gas Monetization business continue on. But right now, absent those new awards, I think we had a really good quarter and maybe we can repeat it next quarter. But we'll just have to see how the performance on that project is.

And we'll take our next question from Steven Fisher with UBS.

Bill, you've talked about likely maintaining backlog in the first half with growth in the second half and you've done exactly that in the first half. So how do you see the second half playing out now?

Well, we are -- we still continue to generate underlying backlog growth on scope expansions. And I think, in the past, we've commented in prior years maybe 2/3 of our growth came from scope expansions. We do believe that in time and then we do have a lot of lumpy issues we're chasing as evidenced by my comments on the LNG projects, on the Lobito refinery and also on the continuation of Ras Tanura as that project moves into execution, where we're doing some of the FEEDs on specific technologies as well as the PMC work. Yes, I feel that if you took a rolling average of our backlog, we will be there. Now I can't comment specifically on what we'll see next quarter. And we do look at our backlog on a reasonably conservative basis and we talked about that in the past. Certainly, the $3.8 billion CENTCOM contract, we didn't add any backlog except for the task order that we were definitively awarded. Another example is certainly in Oil & Gas. We showed a flat backlog last quarter or actually a declining backlog. But again, with the discipline that we put on our backlog, we made in addition in the first quarter on the West of Shetlands project, the customer came back during the second quarter and asked us to consider changing the schedule. And we had some discussions with the customer on the schedule of that delivery. But because of our practice, we reduced the backlog about $60 million in Oil & Gas, during the second quarter. Those questions have been resolved, and regrettably, we're putting it right back in the third quarter. So that explains, a little bit, some of the timing issues in Oil & Gas. But overall, I think, we'll -- we may see backlog go down in the third quarter. A lot of it depends on what the underlying scope expansions are on the existing work until such time as we get some of the big awards into our backlog. And another wildcard we have, Steve, is certainly what's going to happen in Iraq, with the status of forces agreement. We had a good $500 million of backlog added in the quarter. If that business were to remain consistent, we could see some more backlog than we're currently anticipating in the second half of the year. But it's -- on a rolling basis, I think, we'll be okay. We may have a little bit of dip in the third quarter compared to what we would expect to see in the fourth quarter, when some of the larger projects begin hitting our backlog.

Okay. That's helpful. And then just wondering what does the progression of the Dow/Aramco project mean for you in terms of your resource utilization? I think you've said you had about 500 people working on the FEED. And I think, on this call, you said that's going to wrap up later this year. When do those people free up, and do you know what they're going to work on next? And what would that mean for your labor cost absorption?

Well, our sense, Steve, with respect to the new Ras Tanura project is that we will continue the PMC work, and I'm not expecting we'll see material changes to the staffing of the folks doing the PMC work. Now parallel to that, we are doing some FEED work on some technology packages. And those projects could roll into EPC over the coming months and maybe it might be first quarter or later next year when that project does move forward in the EPC packages. But from a broader labor-cost absorption standpoint, we're talking about 12,000 people across all of KBR in that kind of magnitude. And if we have some folks come off, we're still looking at being able to put them to work in other projects we're working at. We do a lot of resource sharing across different offices. Certainly, we've got with the Molycorp and KiOR sales, we've loaded up some of the legacy BE&K offices well above what their present capacities are and we can move some of that work into Houston if we find we have some people. So I'm expecting that we'll be able to successfully manage the labor-cost absorption numbers to 0 or better going forward. And that's certainly the charge we give to our operations group to maintain chargeability. Now when we look at our resources, we have KBR employees and we also have some contract employees that we use as the swing group. And we'll certainly be managing the contract side to reflect the work. But as we look out at the horizon for us, I certainly, believe we'll see opportunities to continue to grow our overall resource pool over the next 12 months.

And we'll take our next question from Rob Norfleet with BB&T Capital Markets. Robert Norfleet - BB&T Capital Markets: Just a couple of quick questions. I guess, first of all, the loss in minority interest in the quarter of $27 million, certainly, was higher than what we've seen in previous quarters. Any thought on that and how we should look at that through the remainder of the year?

Yes, Rob, it's Sue. As we think about that, there's a lot of changes going on in the non-controlling interest. We bought out the piece of MWKL, so we had some changes there. But we also had a couple of items that are in the Q and that we talked about with foreign exchange and with some tax-related trends from pricing that increased the amount of non-controlling interest. So what I would say is, is that the Q1 number probably looks like a better run rate than the Q2 number. Again, these things are nonrecurring and not material to the company but it does skew the number if you're trying to trend it and model it. Robert Norfleet - BB&T Capital Markets: Okay, great. And Bill, just a quick question. Last quarter, you obviously talked a lot about seeing the pickup in terms of utility spending for climate control equipment. Obviously, now we have some EPA regulations that are a little more firm. We've got the Boiler MACT Rules coming up in the number. But what's going to be your thought process in terms of when we'll really start to see a ramp-up in order rates for scrubbers and other anti-pollution control equipment?

Well, I think, we're seeing the first wave of it. I think every quarter, it will become a little bit better within the industry. And certainly, as we look at it, we look at things maybe a little more geographic concentration and we're trying to broaden that within our services group. But I think you're going to see a continued increase in the spending in the utility side going forward. It's been a couple of years since they've really been spending any money on either new generation or the pollution controls. And I think, as we look at the regulations and we anticipate what they're going to say, that there will be a continuing tightening. Now maybe there will be a -- to think what the MACT regulations say, there may be a floodgate of spending that opens up, once there is some definition that's established on what those final rules are. But it's certainly -- the momentum is building, and I think, as you get towards the first part of 2012 that you'll see a much higher level of spending on these types of facilities on the solid power plants.

We'll go next to Jamie Cook with Crédit Suisse.

This is Andrew Buscaglia, in for Jamie Cook. On Jacobs earnings call, they alluded to unit pricing going up modestly in the quarter. Can you comment if you are seeing the same thing? And if so, by how much?

You mean in terms of -- you're referring to margins on work we're selling?

Yes.

Well, I would say, it's again, our footprint's very different than Jacobs. So we are certainly much more internationally focused in our markets and -- but I'll try to give you -- I'll try to answer your question maybe on a market basis. As we look at the International markets, we do see reasonably good margins, but we're also seeing a lot of competition. And we think we're, for example, in the Middle East, where you still have a lot of very heavy Korean competition, margins have remained very narrow, because of their appetite to build some backlogs. In Australia and the complexities of the LNG areas, we think, we'll see reasonable margins there. I think, we'll see large volumes, which -- of man hours, which helps create better dollars for us. But the margins will be reasonable in LNG projects, because that still is a competitive market. Domestically, in the U.S., we're seeing more volume right now. Again, our margins, if you look at our margins and compare them to Jacobs as a whole, we're probably a little -- I think, we might have been a couple points above. So we're seeing margins that are okay for us maybe not increasing yet, but we are optimistic about the volumes. So in our segments, I think we're able to maintain our selling margins, where they've been over the last couple of quarters and we continue to look for opportunities to push them up. And we probably see those maybe on some selective projects. But overall, it still remains a very competitive market out there, given that the volume of projects out there is only now starting to recover both from our perspective internationally as well as our perspective domestically.

Okay. That's helpful. And just on another question. Can you speak about customer concerns on potential capacity constraints over the next 6 months or so?

Well, we have a very active dialogue with all of our customers, because they ask that questions, too. And certainly, as we look out at our business, we built our platform of operating centers to be able to work share. Gorgon is a great example for us, because we've had 5 different offices working on the Gorgon project, because of the investments we've made in technology and our IT infrastructure. But as we look at the different projects, we have different roles. And just the LNG project is a good example on the impacts project, we're going to be 30% with 2 other partners. We're going to be spending more of our time on the fabrication oversight and the construction management on that project. So there's not going to be a big load from the Inpex Ichthys project on our engineering resource centers. We look at the Pluto expansion project. That's looking to go into our London offices, been working the FEED out of the London offices for a while now. The Kitimat project will be done in Houston. So we're seeing some diversity of resources across the company. Ras Tanura is in Houston. Lobito is in Houston. Jazan is in London. And so we have really, 2 very large resource centers, and we're probably the -- to our knowledge, we might be the only company out there able to do LNG projects in 2 separate offices, geographically. So we think our diversity helps us in the way we've structured our participations in these various projects. It does allow us to demonstrate to our customers and hopefully, my comments are somewhat convincing to you that we aren't facing any real resource constraints in this backlog of projects that we would hope to be able to sign up in the next 12 to 18 months.

And we'll take our next question from Andrew Kaplowitz with Barclays Capital.

Bill, if I can tackle the backlog question in a different way. Your job income backlog as you said was up 12%, I think, year-over-year, but you got a lot of moving pieces as we go into the next year. Tax rate, I assume, is going to come up a little bit and LogCAP is going to go down a little bit, and you've got all these big projects out there. So without giving me guidance, how do we think about '12? Are you confident that you can grow earnings in '12 versus '11?

I have to say that we haven't begun our budgeting process yet. So I'll stay away from the guidance issue. The backlog job income is really a theme we've talked about for a while. And we burned probably $700 million-ish of revenue on Escravos last quarter. And you know that's got a very low profitability associated with it. And in its place, we're replacing it with the Solid Waste Authority project, which has market-based margins. And so we're really looking hard at the job income component in our backlog, particularly as Skikda and Escravos wind their way through. We do hope that we'll be able to continue to have a dialogue with the Street regarding new Skikda-type projects that while they may be low margin, will be high dollar contributors for resource allocation that we'd see. But really, the LogCAP has been coming down. We've been talking about that since the IPO in 2006. Now I think, in 2007, we are doing about $5 billion of LogCAP. And this year, we've said between 16 and 18 as I recall, and next year it ought to be lower. So we continue to perform like one-armed paper hangers, wallpaper hangers here of trying to grow the business at the same time letting the LogCAP volumes digest themselves back to a continuing lower level going forward. So we'll comment in January about our guidance for 2012 and a lot of it's going to be driven by the mix. And we think, overall, the mix of job income is increasing, and I think that bodes well for us. And certainly, as these other projects are coming into backlog, the volumes will be there to reinforce some of the margin improvements we're seeing overall in the job income backlog.

Okay. That's fair, Bill. Just a quick follow-up on at, is 30% sort of the new target tax rate as we go forward? Is that kind of what you can achieve, given your mix?

Well, I mean as we look at 2011, the answer is yes, because that's what we told you. And we'll look at 2012 and going forward. But as we go through the budget process, as Bill described it. It may vary a few points up or down from that. But I think, that's a pretty good go-forward modeling, right?

Okay. And so if I can just shift to LogCAP for one second. You had very high gross margins in the quarter, 8.5%. Now that it's fixed fee, I know you said you're going to have an award fee in 3Q or there's a chance of it. But is that -- that's a much higher margin run rate than LogCAP III used to be. Can we count on those kind of margins, going forward?

Well, LogCAP III, Andy was -- if you remember was 1% base fee and 2% award fee, which at one time, we were accruing 8 percentage of the award fees based on historicals and we were adding the overhead rates of our NAGD business. And we were able to drive the overhead rates really low, because of the scale of that business. Today, we are seeing more of a market-based fixed fee on that, but also because of this economy of scale or the shrinking size of that business, the overhead of NAGD is now being allocated over fewer work units. And so this gross margin that you're seeing is reflected in part by the increased margin of the work that we're receiving. But also, the overhead rate has gone up at NAGD. So when you look at the NAGD results, you're seeing bigger margins because the overhead recovery rate is up quite a bit because of the shrinkage in volume, and also, the market base fee. So you got 2 elements working there at NAGD.

We'll take our next question from Will Gabrielski with Gleacher. Will Gabrielski - Gleacher & Company, Inc.: So did you say you're helping out a little bit on Pluto 1 on an as-needed basis?

Yes, we did. Will Gabrielski - Gleacher & Company, Inc.: Okay. And in terms of the language right now on LNG and timing, I mean, it seems like you added a little bit of somewhat cautious language around predicting timing. Is that specifically related to Pluto 2? Or are you seeing that on the other projects as well?

Well, I think, as you look at the overall Australian market, it is -- there have been some interesting articles that when I was down there, visiting customers last month, they've talked about all the mining projects and the LNG projects going forward. And it was eerily reminiscent to what we saw in Qatar in 2007. And it causes us to think that you're going to see some stretching out of the projects as they get the sanction through there. Now we had commented earlier about where our expectations were a couple quarters ago on Pluto 2 and 3 as far as going forward. We haven't heard any definitive comments out of Woodside on that. But certainly as they have looked at the delays and increases in cost on Pluto 1 and the fact that if they were going to do anything on Pluto 2 or 3, they'd have to start with the EPC contractors, 6 months or so before an FID. And since we're not doing anything related to an EPC, and we're doing more of the studies on elements around Pluto 2 for Woodside that, that does appear to be delayed. Although, nothing has been formally stated. But I think, as we look at it, it's logical to expect that it's not going forward this year, and it's going to be in the next year some time. So we're seeing a lot of things happen. The reasons that are happening are not all the same across the board. And as we just -- in the Australian market, are being very wary about what might be going forward just given the resources they have in Australia to get projects approved from the government side or the resources that are needed to put the teams together. And that's why I made some comments about the increasing amount of ex-pats that could be brought in on some of these projects to deal with the Russia projects. But overall I think we're being cautious. I think the market's being cautious. But I also firmly believe that these projects will all ultimately go forward. It's just a question of what time will the owners feel comfortable taking those FIDs and some may get delayed. But as we look at our diversity of projects between the Middle East or Africa or North America or Australia, we think that it's a pretty good balance that we've achieved and work will go forward for us. And we'll just -- we'll be ready when our customers are ready. Will Gabrielski - Gleacher & Company, Inc.: Do you see a potential in Canada for additional FEED work on some of the newly announced projects next to Kitimat?

There could be. I'm not aware of the maturity or certainly, where they are scheduled relative to Kitimat. But you could see a continued discussion, given our gas supply situation here in the U.S. about -- or so in the North American market, overall, about exporting more gas to Asia. There have been discussions on converting some of the rig gas facilities on the Gulf Coast to export facilities as well as there's some early talk about other facilities in British Columbia. Will Gabrielski - Gleacher & Company, Inc.: Okay. R&S and MWKL, can you just maybe quantify, a little bit, how they're performing versus your initial guidance this year?

I think, overall, they're doing okay. We're doing better than we expected at MWKL. We're doing probably a little bit less than what we expected at Roberts & Schaefer. Part of the Roberts & Schaefer business plan we had this year was built more on historically on what they saw in the U.S. market, and a lot of that was driven by the pollution control facility investments and their material handling around scrubbers and coal plants. But I am much more encouraged about the broader prospects of Roberts & Schaefer as they've gotten into the KBR family. And they're certainly more leveraging themselves internationally than they ever have in the past, in part, because of our bonding capability, but also, in part, because of our International project delivery. So from an expectation standpoint, I think, my expectations going forward for Roberts & Schaefer are much more bullish. And I think, the opportunities that we're seeing in India or Indonesia are particularly strong given the new way of selling that Roberts & Schaefer can position themselves as being part of the global KBR entity as opposed to being part of a private equity firm. Will Gabrielski - Gleacher & Company, Inc.: Okay. And then just lastly, FX. What impact did that have on the reported backlog number in the quarter, if any?

I mean, it didn't have a significant impact on the new awards for the second quarter.

And we'll take our next question from Sameer Rathod with Macquarie.

Just a quick question. It sounds like you guys are working on several LNG projects. At what point do we start seeing capacity constraints?

I think, that the major ones we're talking about, I don't think we're going to have constraints, because the way we've set the business up, and I've talked about the relative differences in our role on each of these projects. But certainly, as we look at the London office, for example, we're going to spend 12 to 15 months in the front-end design of the plant, and then we're very quickly going to move after that to low -- to other resource center such as Monterrey, Mexico or Jakarta or Singapore for us. And that creates new capacity for these other projects that are slightly delayed relative to the ones that we think we'll be able to look at in the next 6 to 9 months. So we're not seeing the capacity constraints, given how the company works. In the past, I've used the example of 3 buckets. We have the front-end engineering and the high-level design as 1 bucket. The second bucket is the detailed design at our high-value centers and the third bucket is construction. And we've already seen Gorgon move out of the first bucket into the detailed design centers, creating capacity for the next wave of projects that we have. And then as they move into the field, we continue to free up more capacity. Candidly, we'd like to see some of these awards come forward, because as we look out 6 to 9 months ahead of us in London and in Houston, we've got some pretty good voids we've got to fill with some of these new awards. So capacity constraints are not my issue. It's getting these awards into the boats so that we can continue to maintain our present capacity. And so we're going to work share. But overall, I think, we've got a lot of flexibility at this scale of prospects and that the timing we're seeing for the prospects, we'll be able to easily manage this level of work.

Great. My next question is given the labor constraints and supply-chain issues in Australia, plus the carbon tax, how much do you think that is a driver of LNG projects here in the U.S. in terms of people shifting their focus in building LNG in North America?

I haven't heard any direct correlations. The folks that we talk to in British Columbia, they have gas. They look at the gas. They could sell into the Asian market on a cocktail of oil prices versus what they can get on NYMEX-plus basis and they say, "This is a good decision to do an export facility." I don't think anybody has shared with us any analyses that they've made of Australian capital cost and certainly a lot of it -- if you were to have some capital cost differentials, you're going to make that up in shipping between Australia and the Asian markets compared to North America. But it's fundamentally in the regions, where you have gas. What's the cost of the resource and what are my markets and what's the highest value market for this resource that I have? And those are, I think, the fundamental drivers we're seeing when we talk to our customers on their prospectives of what to do with gas.

We'll take our next question from John Rogers with D.A. Davidson. John Rogers - D.A. Davidson & Co.: Bill, I appreciate the comments on your various projects and prospects there and you talked a little bit about the gaps in between it. Could you size the waves for us a little bit? What I mean, is the opportunity for KBR, what you're looking at in project opportunities maybe in the second half of 2011 versus first half of '12, second half of '12?

Well, you're asking me to -- get me to get a crystal ball off of that, John? John Rogers - D.A. Davidson & Co.: Yes, that's okay.

That's a really forward-looking statement. John, I just think you have to look at these projects and you can guesstimate the size and maybe guesstimate a little bit the roles KBR has, but it's going to vary. And a lot of the variance that you're going to see in backlog is going to be how the project's structured. For example, Inpex Ichthys, that's going to -- we're a 30% player. JGC is 40%. Chiyoda is 30%. We're likely going to treat that as an equity accounting. Now we'll make the determination when the final contracts are signed and we know who is the lead partner and that person will consolidate. But as of today, our thinking is we would not consolidate that. So the backlog will go in as what do we think our engineering hours will be plus our share of the profit from the venture. So you might see something that's much lower than the overall cost of the project coming into backlog. It won't even be proportional accounting. It'll be the equity accounting. And when we get there, we'll try to be as clear as we can with you on that. You contrast that to Pluto 2 or Kitimat. Those will be traditional EPC projects, where we'll be rolling the backlog into -- of the full cost into our backlog. At least, that's our present expectation today. We look at Lobito refinery. That's an EPCM project. Again, that's going to roll completely into our backlog. Ras Tanura, the PMC stuff, will be a lot like Yanbu. It's going to be just-in-time work order releases. There's going to be a lot of money at the end of the day, but you're never going to get it all in one fell swoop. Now the packages for the EPC -- the FEEDs that we're doing on the technologies, those will go in as EPCs. And you'll see some lumpiness there. So it's -- that's about as much credible information as I can give you without really getting out on a limb and at the risk of having a chainsaw working with me. John Rogers - D.A. Davidson & Co.: Okay. But is it fair to characterize it as -- I mean, and I realize, schedules can move around and who knows what the competition does. But the bulk of the opportunities for you, that you've described here are potential bookings in the first half of '12?

Well, I would say, just based on the comment, we believe that Inpex will go forward this year and the Chairman of Inpex was adamant that he wanted to get it done and didn't want the contractor to delay it, which was music to our ears. We also believe today that Sonangol is working towards getting that project completed and under an EPCM contract this year as well. You look at Kitimat. I think, we commented first half. Pluto, I think, our expectation has moved out from this year into, we hope the first half of '12. A lot of it depends on what Peter Coleman, how he wants to proceed on those other projects, and given the status of the continuing work on Pluto 1. So I feel pretty good it will be a 2012 project, and I'm hopeful it can be a first half of 2012. Ras Tanura, we complete the FEED this year. They take some time to figure out what they're doing. So you could see some of the larger packages awarded to us, second, third quarter on that. Kitimat, they have continued to maintain that they're moving forward in the first half of next year. So that's the horizon we're looking at right now. It may be a little more helpful, it may have confused you, so...

We'll take our next question from Tahira Afzal with KeyBanc Capital Markets.

My first question is in regards to floating LNG. We've seen a couple projects come up and Technip was talking about that on their call as well this morning. I would love to get a sense from you on if that could potentially be an opportunity for KBR at some point as well? And my follow-up question, I'll just wrap it in this one is really to do with the Downstream side. Again, a comment by Technip, earlier on this morning that some of those projects outside of the Middle East that are going forward as a joint ventures and need project financing are getting a little pushed out, because of some struggles on the financing side. So would love to get a comment on whether there are some projects that you might mention that still need some project financing.

Well, on the floating LNG, when that was first raised a couple years ago, there was a view that the designer of the floating LNG facility would be joined several with the fabricator. And yes, that was an interesting risk allocation, because the fabricator had probably 85% of the scope, and to be joined in several was a little bit of a challenge. And so we missed the boat on that one a couple of years ago on the Prelude project. We've continued to have discussions and get more in-depth with the fabricators, principally in Korea, about what we might be able to do in that regard. We certainly have the capabilities as KBR. We do LNG. We do FPSOs. We do all sorts of marine and onshore facilities using these technologies. So it's something that we're interested in getting into and think as this market develops, there'll continue to be opportunities that we'll pursue to be in the floating LNG market as Technip has done to date. And I congratulate Technip on being an early entrant in the floating LNG market. Regarding the downstream projects, the ones we're seeing in the U.S., don't appear to be driven by project financing. I know the ones we're seeing in the Middle East that are sponsored by Aramco haven't historically or to my knowledge had any project financing involved. They're just balance sheet execution. And how Ras Tanura evolves, I think, there were some discussion maybe a flotation on the market in Saudi of shares on that. But I don't see that as being a condition present to moving forward. I see that as being just something that will go maybe more on a parallel path. In Sonangol, they've looked at some packages. They might bring third parties in on a build-own-operate transfer. And so there's some discussions going on there. But we're aware of that and supporting them on what options are available to them as they're contemplating this refinery. So it's a little bit out there as far as some folks looking at the downstream. But I'm more focused on the competitive aspects in the downstream market than I am necessarily on the financing. I think, there are a lot of good projects, they'll all go forward over time. And what we focus on is how do we pick the winners and win those projects that will go forward, where KBR can add value to our customers.

And our final question comes from Robert Connors with Stifel, Nicolaus. Robert Connors - Stifel, Nicolaus & Co., Inc.: If I think of KBR scope for the 6 LNG projects cited, how will your scope differ versus past LNG projects KBR has done as it compares to say, the level of content for engineering, procurement management and construction management?

I would say that the Inpex project that I described earlier is probably one where we're going to be doing the fabrication oversight and the construction management on that site. The trains are going to get designed in Japan. Yes, as we think about that, we look at the Tangguh project, where we were supporting JGC in a similar fashion, while they did the trains on Tangguh, we were doing the fabrication and construction management. So that role is -- will have a lot of similarities to what we did on Tangguh. Now you look at the Kitimat or the Pluto Project, they'll look and be more like Skikda, and not necessarily in the commercial framework. But they'll be like Skikda in terms of the consolidation of all the engineering procurement materials and construction and construction management. Browse, which we haven't talked about much about on the Q&A is out there. That's a big project, and we have some partners that we've brought in that are pretty good civil contractors for ports and the jetties and matter. So we'll probably see a -- you could see a consolidation of that project. But our scope could be more of the engineering, the fabrication management and part of the construction management on that project. Gorgon as it's evolving now may not include partners. That partner group may be more subcontractors for us because of the some of the complexities that have evolved in dealing with Chevron on that. They were managing them. But I think Chevron is looking for a single point of contact and they like the team. They just think it may be more efficient for them to have a single point of contract as opposed to a consortia approach. So it's going to vary across the board on what our roles are. But none of the roles are roles that we haven't done before. They're in pieces of work either the entirety of the project or in the certain sections that I commented on Inpex that are consistent with what we're comfortable doing and have done in the past. So it's really dependent on the partner arrangements and how we have positioned ourselves on each of the projects.

And that was our final question today. At this time, I'd like to turn the call back over to our speakers for any closing comments.

I just would like to thank everybody for tuning in. We appreciate the questions and interest in KBR. And we look forward to our call at the end of the third quarter. Thank you.

This does conclude today's conference. We appreciate your participation. You may disconnect at this time.