KBR, Inc. (KBR) Q1 2016 Earnings Report, Transcript and Summary

Welcome to KBR's First Quarter 2016 Earnings Conference Call. [Operator Instructions]. For opening remarks and introductions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining us for KBR's first quarter earnings conference call. Today's call is also being webcast and the replay will be available on KBR's website for seven days at kbr.com. The press release announcing KBR's first quarter results is also available on KBR's website. Joining me today are Stuart Bradie, President and Chief Executive Officer and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call, Stuart and Brian will discuss KBR's financial and operational results, provide an update on our progress against our strategic objectives and discuss our market outlook. Please refer to the accompanying presentation that is posted on our website at kbr.com. After our prepared remarks, we will open the floor for questions. Before turning the call over to Stuart, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in KBR's first quarter earnings press release; KBR's earnings presentation; KBR's Form 10-K for the period ended December 31, 2015; and KBR's current reports on Form 8-K. You can find all these documents at kbr.com. Now, I'll turn the call over to Stuart. Stuart?

Thank you, Zac and thank you for joining us this morning. So starting on slide 3 -- KBR's Zero Harm. Our commitment to Zero Harm remains unwavering. We believe it's not only our responsibility to look after our people and those we work with, but it's also simply good business. And I'm pleased to report that our improvement in performance continued into 2016 and you can see our total recordable incident rate is now very much top quartile, so significant progress and a fantastic effort by the team. Moving on to slide 4, so continued progress was made against our strategic objectives, both the objectives we laid out in December 2014 and against the key focus areas we presented at year end for 2016. The first quarter earnings reflect continued solid execution across our core businesses. It's worth saying up front that we expected a slow start in E&C this quarter due to the phasing of work under contract and that phasing will show an improvement into the second and third quarters. There continues to be challenges in the hydrocarbons market. And as we presented, again, at year end, the Government Services business is growing and the markets are growing. The markets we're in are growing in that sector. And we continue to look to differentiate ourselves through high-end, technically significant offerings. To that end, we won the fixed wing training contract in the UK we talked about for some time and we remain the preferred bidder for Army 2020 and we will talk a little bit more about that later. Additionally, awards for the U.S. military international operations support were realized in the quarter and more are expected as we move forward throughout the year. Our cost savings are very much on track -- $200 million by the end of 2016. We've identified and actioned $180 million to date, so good progress in that area also and we continue with our balanced capital allocation policy. We continue to pay a competitive yielding dividend. And we made our first acquisition in the quarter since my tenure of Chematur in the technology area and we made a modest investment in the MFTS joint venture. Importantly -- strategic discipline is really important -- and both are consistent with our strategy to expand Technology and the Government Services portfolio. So to conclude the summary of the opening remarks, we hold our guidance for 2016 with EPS between $1.20 and $1.45, excluding costs associated with legacy U.S. government projects. Now, I'd like to hand it over to Brian who will put a bit more meat on the bone around the numbers.

Thank you, Stuart and good morning. Turning to slide 5, an update on the dispute resolution status. When we last talked about the government audits, particularly relating to LogCAP, we still had $9 million of costs being questioned by the government. During the first quarter, we managed to close those out well within our allowances. And with that we basically closed out all of the major heavy billing years of the Iraq war, 2003 to 2011 and that was approximately $46 billion in costs that had been invoiced, with a recovery rate of 99.9%. So, pretty good item to get behind us and significant reduction in risk from where we were, say, 2.5 years ago when I first joined the Company. On the sodium dichromate cases -- these are cases brought by soldiers who were exposed to sodium dichromate at an Iraq water treatment facility. As you may recall, these cases have been dismissed based on the merits, including a finding that no one was injured. Although the plaintiffs are appealing, the risk, again, has dropped significantly associated with these. As part of that ruling by the court, we were found to have an indemnification in the contract to protect us. And separate from the proceedings with the actual soldiers, there was legal action with the U.S. government -- a dispute resolution relating to reimbursement of the costs associated with defending these lawsuits. We had previously been awarded -- the fact that we're entitled to reimbursement. And during the first quarter, the U.S. government decided not to appeal that ruling. So we're in discussions with the government in terms of the mechanics and timing about when we may be able to seek reimbursement of those costs. This is approximately $30 million. I wish to remind you that we have nothing recorded in our books associated with the $30 million, in terms of receivables, so we expect we'd collect monies in the future. That would be upside to both cash and to the P&L. So, again, a significant de-risking and some upside potential for us as we look out at the balance of the year. On Pemex, unfortunately, there's no news; nothing has changed since we last spoke about this at year end. We're waiting for the court ruling. As a reminder, there's a $465 million award in our favor. The cash is on deposit in New York and we're just waiting for the appeals court to rule. Turning on to slide 6, looking at the financial results. New awards for the quarter is about just under $800 million and we have a backlog of $12 billion -- rather healthy, good backlog of $12 billion. Moving on to revenues, revenues were down about $440 million year over year. However, $200 million of that reduction relates to the deconsolidation of our industrial services business which we sold 50% of last year and we continue to get 50% of the economic benefits. But since it's deconsolidated, there are no revenues showing up in the P&L, as well as the sale of the Building Group. Between those two, it was $200 million of that $440 million. Additionally, a year ago we had three EPC power plants under construction. We're now down to one. And finally, we have a large LNG project in Australia which, I think many of you know, is getting to the back end of that project. So the activity levels have dropped as we get to the latter stages of that project. Gross profit and equity earnings reflects the solid business performance, as Stuart mentioned earlier. The Government Services business had good growth, with some of the task orders from the U.S. military, as well as the signing of a $15 million change order in the Middle East. This change order is reflective of work that was largely done last year, where we had incurred the costs and those costs were expensed since we did not have the change order and we were successful in getting a contract extension and, therefore, able to recover those costs in this quarter. Additionally in gross profit and equity earnings line, the lower reduction on the LNG project I previously mentioned are reflected there. We also had some, as usual, adjustments on various other projects which netted out to about a $4 million negative impact on the quarter. The $5 million reduction in G&A reflects the continued cost-reduction initiatives and we had some severance during the quarter of $2 million. We also have a gain on the disposition of assets related to the true-up of some working capital of some of the companies we had previously sold. Those two net out to about a $2 million gain, resulting in net income of $42 million, $0.30 per share and $67 million of EBITDA. Turning to the segments on slide 7, the revenues, we mentioned, are down for the reasons I previously articulated, but Technology & Consulting's revenues were up and that reflects new proprietary equipment sales. If you will recall from last year, we had very high margins in Technology & Consulting which we said was a mix issue, where we had more technology sales and very low proprietary equipment sales. We had cautioned you that would turn around over time; and in the first quarter, that's exactly what happened. We had more proprietary equipment sales, so revenues are up. When we get to the gross profit and equity earnings, you will see that margins are down because the proprietary equipment carried lower margins than sales of technology licenses. E&C revenues reflect the deconsolidation of the Industrial Services business I talked about, as well as the LNG project. Government Services reflects the task orders, primarily for the U.S. government work that we're doing internationally. The Non-Strategic reflects the building sale and the reduction in volume, having only one EPC power project operational now, when we had three a year ago. Gross profit, T&C, reflects the equipment sales we've already discussed. E&C reflects the underlying good business performance. The two LNGs continue to perform well, as well as it reflects the $4 million negative impact on changes and estimates we previously discussed. Government Services, again, good performance -- the task orders and the change order previously discussed helped that group. Non-Strategic reflects that one power project that continues to work off and is scheduled for completion in 2017. If you look at EBITDA, on the other line, we've got about $4 million of foreign exchange loss in that line, where a year ago we had an $8 million gain and that reflects the variance between 2016 and 2015. Moving on to cash on slide 8, we still have a fair amount of cash, $824 million at the end of the first quarter. We had cautioned you that the cash would come down in the first quarter and, frankly, it came down a little bit less than what we had anticipated, so it may come down a little bit more in Q2. The cash balance, though, reflects the acquisition of the Chematur subsidiaries of $25 million. The MFTS contract in the UK required us to inject $14 million as capital allocation to that project and again, we continue to pay a dividend. Our balance sheet remains strong and we're looking at opportunities to redeploy our cash. You see we returned $13 million to shareholders during the quarter and just under $1.1 billion since the spin back in 2007. With that, I'll turn it back to Stuart and he'll talk about the markets.

Thanks, Brian. So market outlook, the global hydrocarbons market remains difficult for E&Cs, so I think it's absolutely essential there is prudent cost management. But opportunities do remain and I'll talk about that in a second. The update on Magnolia LNG, I'll just remind you, it's a $4.3 billion EPC project -- is that they received their FERC approval. And that FERC approval also included the Kinder Morgan pipeline, so all the component parts are in place now and all their effort is really about selling LNG. They appointed a new CEO, Greg Vesey, in the period. We think that's a good move. Greg has very strong industry experience with Chevron and particularly in the gas treating side, so he brings a new level to Magnolia LNG. And we extended our bid validity until December 2016. In the other markets, we continue to see ongoing demand across refining and petrochemicals. The Middle East, particularly in petrochem and North America with movement and in Iran, the next wave of ethylene crackers, where we feel that we're reasonably well positioned. On the U.S. construction side, we're continuing to see opportunities in expansions and in the major brownfield area. Maintenance and turn-around opportunities increased, as you would expect, as major IOCs and national oil companies focus on increasing output efficiencies from existing assets, so really sweating what they've got today for maximum benefit. In Technology, portfolio expansion opportunities still remain a focus for us in that area. Moving on, in the Government Services sector, markets across the globe continue to expand. We've talked about it already in this call, the increase in U.S. military overseas support spending. Strategic opportunities exist in the UK and Europe. And I just came back from Australia and there's increased spending committed in Australia and obviously in the UK also. Just to reiterate, our strategic focus is on differentiated services, really in the technical know-how area and the intelligence arena. In summary, in 2016 and beyond, we see KBR's portfolio diversity driving opportunities really in Technology and predominantly in Government Services area and across other annuity revenue streams, with the whole focus of trying to provide KBR more continuity and cyclical protection. And I talked about that in the last call also and I think you've seen it coming through in the results in the first quarter. Our balance sheet provides strength, as we talked about many times; it gives us great optionality and it gives us the ability to move quickly as strategic opportunities arise. As Brian has already mentioned, we're looking at areas how best we can deploy our cash. It takes a little while. So in summary, a solid start to the year. The Technology and particularly Government Services, revenues increased, offsetting E&C headwinds. As we talked about before, our business mix provides counter-cyclical protection and the Government Services market is growing across the world. We booked the MFTS contract in the UK and multiple U.S. government task orders. We completed our first acquisition and our balance sheet remains strong, providing future optionality. And just to conclude, our 2016 earnings-per-share guidance remains unchanged. So before I hand it over to questions, it's probably worth saying up front that you may have read recently a number of articles in the press concerning a company called Unaoil and allegations of that company may have been engaged in various activities and international projects that involved several global companies, including KBR. It's also been reported that the U.S. Department of Justice has conducted an investigation of Unaoil related to information reported in these news articles. It is our understanding that, in connection with the investigation, the DOJ has contacted several companies, including KBR and we're, of course, responding to the DOJ's request for information. I'd like to reiterate that KBR is committed to conducting its business honestly, with integrity and in compliance with all applicable laws. We certainly do not tolerate illegal or unethical practices by our employees or others working on behalf of the Company and that's probably all we can say on that Unaoil matter at this juncture. So that's all for me, at the moment and we will hand it over to Zac.

Operator, at this time, we would like to turn the call over for questions.

[Operator Instructions]. At this time we will hear from John Rogers of D.A. Davidson.

Stuart, you talked about derisking the business a little bit or reducing the cyclical exposure, but I'm wondering, per some of that mega-project opportunities. In the past, you've talked about the chemical industry or the fertilizer projects and some of those things are out there. Can you give us an update on if there's any real potential over the next 12 to 24 months for some of those opportunities for KBR?

Yes, John, I touched on it a bit on the presentation. We do think there still some strong opportunities in the refining and petrochem sectors, particularly across the Middle East and North America. We're seeing a number of opportunities, in I guess the brownfield area and the expansion area and these are reasonably significant projects. And we also feel that the next wave of ethylene crackers, we feel that we're fairly well-positioned for that. So we're seeing, still, opportunities in that area and opportunity around LNG at the moment. The sector is depressed; there's an oversupply of LNG, everyone understands that. But we do think that Magnolia and others that were working on it, are at the right end of the cost curve and if that market starts to adjust, we feel we're appropriately placed to take advantage of it.

And are you seeing these -- I know timing is always difficult, but are these 2017-type opportunities or can you give us some framework there?

I mean, certainly if you talk to Magnolia, their expectation is that they would move into, I guess project closure, if you like, financial closure in 2017 and move the project forward in early 2017. But that's something they put out there, but who knows. That's really up to how well the market there, in LNG and how well people respond to a slight increase in oil price over the last little while.

And we will go next to Tahira Afzal of KeyBanc.

First question is, in your 10-Q you've indicated your backlog burn and if you were to split that up into four nice quarters [Technical Difficulty] -- revenue. You know your quarterly revenue is up out of trough and start inflecting the other way, just even based on what you have in backlog. With that be the right assumption?

Tahira, you broke up a little bit at the beginning of the call. If we've understood correctly, though, we don't think we have hit a trough. What we said on the call is that the phasing of some of the work will be heavier in the second quarter compared to say the first quarter. That was just the actual execution of several projects that we have the backlog. I didn't hear the full extent of your question.

Sure, if I take the 39% backlog burn number you have given in the 10-Q, that roughly equates to around $4.6 billion going forward over the next four quarters. That compares to something that, you know, at that level to -- over the last four quarters. So I guess what I'm wondering is, have you reached a point do it on a quarterly basis, perhaps, in the next quarter or the quarter after, I don't know. But do you feel based on that backlog burn assumption you have given, that your revenue line should start to inflect?

Certainly, in the Government Services business, we expect to continue to grow. The statement around the timing of the backlog burn on existing projects, so not new projects, but existing projects at hand. We would see that going up into the second and third quarter, sort of where it is today.

And I guess based on the -- I know you gave some qualitative commentary last quarter. You gave some qualitative commentary on 2017? Is there any update to that? Or given the cross proximity of fourth quarter and first quarter, it's kind of same?

Yes, that's correct. We still stand by the statements and think what I was explaining at the end of the year has been reinforced through this quarter, is that we've got a dynamic in the business where the Government Services side of our business is growing, while there are headwinds in the E&C part of our business and that dynamic, particularly around Government Services will continue to grow and reinforce into 2017.

And we do have a question from Steven Fisher with UBS.

This is Cleve Rueckert on for Steve. Thanks for taking the question. I don't think you talked about -- do you have any update on the Tangguh LNG project and then along those lines, I think you're looking for some change orders on legacy LNGs. I don't know where you stand on that. That would be helpful.

On Tangguh, there's no official word, but in my view at the moment, it's not looking particularly good for us, that would be the straightforward statement. In terms of the change orders, you know we're working towards resolving them, that is going to be later in the year. And I think what is worth stating is that our LNG earnings for 2016 are still forecast to be the same as what they were in 2015. We stand behind the statements we made last year around that fact.

Stuart, I know you are looking for some pickup in chemicals, but just thinking about the E&C business over the longer term, if bookings don't pick up, what kind of strategic alternatives are there?

You know, I guess the messaging around the fact that we're not solely relying on E&C is a strong message. The Government business is doing far better and clearly it's providing some derisking associated with the challenges in the hydrocarbons market. I think the key for the E&C is make sure they execute well on what they have and retaining the talent they have in the business. It is a cycle that will come back and that's really the overall strategy. But you do have to also realize -- and we've talked about this before at the end of 2016 -- sorry, the end of 2015 coming to 2016 -- that we see strong growth on the Maintenance side and so our Maintenance business, the sustaining capital part of our business, is something we're very much focused as IOCs and NOCs need to do as much as they can with the assets they have. We're seeing quite a lot of activity in that arena.

Our next question from Andrew Kaplowitz of Citigroup.

So Stuart, can you help us put your cost program in better context? You've taken $180 million of cost out of your business, with the goal of $200 million-plus and that's now very close. What's obviously difficult for us, is that sales have continued to come down and pricing is under a bit pressure, so it's difficult for us to see how much of the lower cost is simply getting used to keep you competitive, versus how much is real structural savings going forward. So maybe one way to do it is through SG&A as a percent of sales, is the goal to keep SG&A relatively close to 3% [Technical Difficulty] sales or should we not be thinking like that?

Right of the bat, I think we've always said that the dollar's a dollar for us. There's no smoke and mirrors in terms of the net cost coming out, because one of the biggest challenges we have, I bet it's the same for all E&Cs, is people on the bench and so you've actually got to manage that part of it very carefully. I think we're doing a good job there, so it's as true cost out the business. The second part is, that there's some that comes through the SG&A line, the G&A line and the other is actually held in the business itself. We've always said that there will be a give-back, in the competitive environment as margins are being squeezed for some of those cost savings. I think they way to think about it is look at our performance across the revenue versus the term lines and think about it as the revenue has come down for the business, the performance, the EBITDA level, has been sustained. I think that's probably the best way to think about it.

Okay. Stuart, that's fine. If I shift gears, you had relatively strong result in your Technology business, but if we look at some of your larger competitors who also specialize in refining or petrochemical technology, they had a relatively difficult quarter and spoke about more weakness in Technology than you are. Your backlog in Technology has been slowly decreasing a little over the last several quarters. I know that's because you've actually burned a lot of revenue. So can you talk about your outlook for the Technology business? How much visibility do you have into the Technology business and do you think you can see a stabler, growing business in Technology moving forward this year and into 2017?

I can't really talk to the competitors, I'll just talk to what we see. Certainly, the introduction of Chematur has been a good one, in terms of strengthening our the technology portfolio, but you've got to think about where our Technology is pointed. We've talked often that KBR is very much a gas-focused company. We think gas is the energy of the future and most of our technology is actually focused on monetization of gas and we continue to see that as a good market going forward.

So do you think, though, sitting here today, is Technology a growth sector for you into 2017, is that kind of what we should still think for that business? Is there enough visibility for that?

By its very nature, the Technology business is probably more shorter term than the larger E&C projects. We still feel strongly about Technology; we think it's a good business and terms are strong. So yes, I think we would look to be growing the Technology business and we're still looking to grow our portfolio. That's probably what's happening there is, what we have in that sector is technology and consulting and the consulting part of the business, particularly the bit that opposite the offshore side is coming down, as you would expect in this market which is -- often technology's offset that performance somewhat.

We will hear next from Jamie Cook of Credit Suisse.

I guess two questions. The first is for Brian. Brian, is there any way you can help us on how we think about E&C profits on a normalized basis or what the profit number is in total for 2016? I understand you are saying 2017 is in a cliff event and that LNG profits will be comparable to last year, but it's tough, because you look at your first quarter and you said you had a slower ramp. You also said you had a favorable change order in there from a project and it's just hard to figure out what normalized profit is if we look at where we exited last year, relative to where we're going to be this year. And then I guess my second question or one, congratulations on the LogCAP and sodium dichromate case. I'm just trying to understand how big of a deal this is for you, Stuart? You know, in terms of -- one, is there an opportunity for legal costs to come down incrementally? Or two, does this Unaoil issue that were talking about, is that sort of -- is that the next big issue, so really don't have a lot of these legal disputes behind us? Thanks.

Okay. I will take the first one, Jamie, on the E&C. I think the E&C had a relatively normal quarter. Maybe the volume was down a little bit because of the phasing on the contracts, but we always have some adjustments, some positive, some negatives, so I don't think there was anything so unusual about that.

But your profits were down considerably year-over-year, right? And I don't know if that's the new run rate? That is what I'm trying to figure out. Because if you look at your E&C profits in 2015 and where we're starting in 2016 on a profit basis, you are down considerably, so I'm trying to understand -- is this the new run rate? Is a little higher than this? Is it somewhere between 2016 and 2015? I have no idea.

Okay. Well, the only guidance I can give you is what we've said in the past, in that the margins are expected to be the high single digits on a run rate basis, so we don't think there's any change from -- that's our goal. We have been hitting that and expect to continue to do so.

But is the revenues that we said -- you know, that's helpful -- but the revenues were also down considerably. I mean is $600 million or so the new run rate? I mean, I guess it should be about higher than that, given the ramp that you guys talked about. Again, margins are nice but if your revenues are down considerably that has different implications for where we exit the year in E&C profits.

I understand. Like I said, it should be higher going forward because, as we said, this would be a lower quarter. We don't want to get into specific guidance about what each individual segment is going to be from a revenue perspective. But the best we can give you on the margins and you know we try to have a diversified portfolio, so some may be up, some may be down, but you should see it go up later on in this year, but beyond that, I don't want to get into predicting individual segments on a longer term basis.

Can you quantify how big the change order was or whatever the positive gain in the quarter was, on that project? I think you guys talked about in the 10-Q, but you didn't quantify.

In effect, we said the net between the two is about $4 million. We're trying to address a little bit maybe on the margin side, but we had things going in opposite directions, more than one, some up, some down and then they basically net off to the $4 million advert. So we're talking low double digits, both ways.

And then sorry, Stuart, just how we think about you know, the favorable resolution on the LogCAP and the sodium dichromate. I'm just trying to figure out what the longer term implications are. Could legal costs be lower? And then I don't know how big of a deal this Unaoil thing is?

Yes, I think on the LogCAP fee and the sodium cases, I think it derisked the business significantly. They were bigger mines that were being audited. I think we've come through it. We've said all along. A couple of things that we felt we had behaved appropriately, the audits have borne that out. I think we had also said that we would win the cases that we had on the merits. That's been borne out and as consequence of that, the recovery of our company's legal costs, because we've always said it's a reimbursable contract. And now it's actually happening, so again, that's been borne out. I think it derisked the business and I guess proves the statements we been making for some time. We've tried to do a better job of educating the street in these models because we felt we probably had been not giving enough information around and hopefully we did our best on that. So is it a big deal? Yes, it is a very big deal, it derisked the business considerably. And I think that the other piece of it is that, there has been historically quite a bit of negative press about KBR and what was happening in Iraq and I think we've come through that. I think the relationship in the U.S. Army has improved significantly and we value them as a customer and certainly what we're doing now in supporting them in the Middle East, is I guess the proof of pudding in [indiscernible] and demonstrating that. In terms of Unaoil, we've always got have legal cases that would appear in this business. Could legal costs come down as we move through the year? The answer is, possibly; we certainly at this juncture don't want to say too much more about Unaoil. We've said what we can. As we said, there's number of different companies involved in this, that KBR is only one of those and certainly, we've got as robust a compliance program as anyone, given our history. That's probably all we should really say at this juncture.

And I would add, Jamie, that we have given the guidance of $15 million in legacy legal fees related to the LogCAP and Rio contract. That remains unchanged from what we had given at year-end.

And the next question is from Anna Kaminskaya.

I just wanted to touch on your free cash flow outlook for the year, probably some of the large Australian LNG projects ramping down, maybe government growing, how should I think about your free cash flow conversion? And I guess as a follow-up, you highlighted the derisking of the business and given where your stock price is, how do you think about your buyback appetite? So I'll start with that.

Okay, in terms of the cash flow for the balance of the year, I think you should think about it in terms of from where we're today, relatively flat, maybe down a hair, as I mentioned next quarter, from where we ended the first quarter, but relatively flat for the year as we continue to work through some of those legacy -- the power project in particular is probably the biggest drain there. In terms of redeploying the cash, you know we mentioned that we're looking at opportunities. We have a balanced capital allocation. I think we've been good at returning capital to shareholders and we've now started a bit on the M&A side. So, our committed to a balanced capital allocation remains and when we have something to announce, you will all hear it at the same time.

But the fact that you've closed some of the audits has not increased the appetite for buyback, is that a fair statement?

No, I don't think the audits have any impact on that. We've derisked the business, don't get me wrong, but in our view, that was something always that we thought was manageable and it's nice to have it behind us, but that never was a big issue in my mind about how we deployed capital.

Okay. And then as a follow-up on just your maintenance. You focus on driving maintenance and turn-around opportunities. It just seems like pretty much everybody in the space is trying to get bigger in that end market. How do you compete against may be some of the more sizable competitors and what's your strategy to get bigger in the space and what does it do to your margins? Because I always thought of that business as kind of low-margins and maybe sizable E&C projects.

Well, I would say that we have been in the business for a while and we sold 50% of our domestic business in order to grow it. It seems counterintuitive, but we think we have a good team and that business, in my experience, particularly here in the U.S. is very, very relationship-driven so it's people that are been working together for many years, they know one another, they trust one another and that was the objective behind bringing in some complementary management to what we already had. In areas where we were not very strong, geographically and combined areas where we were strong and we had mentioned in our strategy for 2016, taking that model on the road internationally. Where you have the local knowledge and the local relationships and the local expertise combined with an international E&C company like us, who build the plants and also maintain them throughout the full lifecycle.

I think it is safe to say the other differentiator we have is our technology, so facilities utilizing our technology gives us an edge in terms of being able to work those plants and sweat those assets. I think other piece in the Middle East is that the Middle East is now embarking on outsourcing maintenance in many of their markets the first time; we're at the forefront of that. In Saudi Arabia, we've got the only truly outsourced maintenance program happening now. Many are watching to see how it is performing and it is performing very well and as a consequence of that we feel, again, we're in a very good position to take advantage of the market changes there.

[Operator Instructions]. The next question comes from Chad Dillard of Deutsche Bank.

I just wanted to piggyback on Anna's question. As you think about making a greater push into the operations and maintenance business, can you just talk about how you are contemplating the trade-off between maintaining these improved margins that you have versus conceding price to gain a foothold? And are you actually conceding that price right now?

I mean, you have to think about the maintenance business is a broader cycle as well. If you can get yourself entrenched in the maintenance business, as you look at actually expanding or driving efficiencies through the plant, you're looking for consulting-type services to be able to do that and technology-type services to do that which drives higher margins because the technology solution, you can bring that in, again at the higher margins. And then you execute the work as you go forward and the maintenance piece of that, you're quite right; it's typically a reasonable cash cow, but again, long term and unity type deal, but you're quite right, typically a little but more margins. So it's a balance. Once you are engaged in the maintenance side of the business, there is a cyclical nature to the business that allows you to take advantage of both your consulting piece and your E&C piece around the maintenance side of it.

Just moving over to the Government Services business. You provided some good color during prepared remarks on just like the overall end markets, but I just wanted to zero in on how do you think about your project pipeline? How big is it? And what is the mix between U.S. work versus UK and the rest the world? Any color there would be helpful.

We don't really talk about the size of the project pipeline, per se, but I would say that there are significant opportunities both in the UK and we've sort of specified a couple of those in the past. Those continue and the Army 2020 one is quite significant. We believe we'll close that in Q3. In terms of looking at the U.S.-side of it, we're seeing a significant uptick in task orders associated with supporting the U.S. in the Middle East, but there's also a number of significant traditional base operating type facilities. Management contracts that we're tendering right now. It is a highly active market.

And the next question is from Adam Thalhimer of BB&T Capital Markets.

Can you give an update on floating LNG? You talked about a couple opportunities in previous calls and there's been some articles about some positive movement on one job in particular. I'm just curious, if you can comment on that and what the typical project size would be for KBR?

Opportunities do exist in floating LNG. We're chasing a number of them now. In terms of the size of those opportunities, it's $5 billion- to $6 billion-type investments, depending on where you are in the world. And the scale of the facilities themselves. So they are quite significant, but again, they've got the same challenges that the LNG market has generally, there's an oversupply of LNG in the short to medium term.

Okay. And then would you run with the full $5 billion to $6 billion hit backlog? Or if it's a JV, you'd split that in half?

The latter, probably.

Okay. And then on the second wave of crackers in the U.S., are the project developer still looking at using ethane only for inputs or are they considering diverse, more diverse input streams?

I think they are considering all options, just given where the gas pricing is at the moment.

Okay. And sorry if I missed this, maybe you discussed earlier, but the gross margin in Government Services, obviously very good in the quarter, is that also a good run rate going forward?

Well, we cautioned you, we had the $15 million change order which caught up for some of the expenses that we had charged out from last year. So no, it will come down from that, unless we had a significant surge in volume of business.

And we will go to a follow-up question from Tahira Afzal of KeyBanc.

Just a couple of quick questions. Number one, you clearly have defined yourself as finding a niche on mid-scale LNG now with Magnolia and the technology there. Can you talk about anything you are doing on the mid-scale in other areas as well? I believe maybe petrochemicals sector [Technical Difficulty] --

So we're working on that which is a very interesting, highly prospective opportunity. In terms of the petrochem side, in terms of mid-scale, I think the mid-scale piece of petrol-refining and petrochem is around expansions of existing assets. There are still significant greenfield opportunities that we're seeing out of the Middle East and in North America, both in the petrochem sector and in ethylene side.

And last question there, I just wanted to get a sense if you can provide any more color on that ammonia project where you saw some increases in costs? Just because, you know, sometimes those domino quite further. Any kind of comfort you can provide on 2016 would be helpful.

I think over the last 12 months we've worked very hard to ensure that our project performance, as Brian said, there are ups and down across the project portfolio. We've had on that particular job, it's isolated incident relating to one piece of equipment and we've taken a prudent view as to where that's going to land and I think we've captured it the quarter.

At this time I would like to turn the call back over to Mr. Stuart Bradie for additional or closing remarks.

Again, thank you for taking the time. We do appreciate your time and listening in to the call. Obviously we will have follow-up calls with myself, Zac and Brian over the course of the next few days. But thank you again.

And again, that does conclude the call. We would like to thank everyone for their participation today.