Business Context and Reporting Period
KBR, Inc. filed this Form 8-K on May 1, 2014, to announce the non-reliance on its previously issued consolidated financial statements for the year ended December 31, 2013. The company is preparing to restate these statements due to accounting errors and cost estimation issues identified during the preparation of its Form 10-Q for the quarter ended March 31, 2014.
Key Financial Metrics and Impacts
- Pre-tax Charges: $158 million related to seven Canadian pipe fabrication and module assembly contracts. This includes a reversal of $23 million in previously recognized profits and the recognition of approximately $135 million in estimated losses.
- Revenue Error: An overstatement of revenue on a long-term construction project of approximately $9.0 million pre-tax ($6.3 million after tax).
- Tax Provision Error: An understatement of the income tax provision of approximately $6.5 million for the year ended December 31, 2013.
- Liquidity Position (as of April 30, 2014): Consolidated cash and equivalents of approximately $900 million; outstanding letters of credit of approximately $632 million.
- Cash Flow Impact: The forecast net negative cash flow to complete the work on the seven contracts is expected to be less than $45 million.
- Share Repurchases: Between February 27, 2014, and April 30, 2014, KBR repurchased approximately 3.4 million shares for a total of $94 million.
Material Changes and Restatement Details
The filing details significant adjustments required for the 2013 fiscal year and the first quarter of 2014. The primary driver is the reassessment of costs to complete seven contracts in the Services business segment, which were awarded in 2012-2013. Management believes the majority of these losses should have been recognized in 2013. Additionally, specific errors in revenue recognition and tax provisions were identified. Consequently, the company cannot file its Q1 2014 Form 10-Q until after the amended 2013 Form 10-K is filed.
Guidance, Risks, and Contingencies
- Guidance Withdrawn: KBR has withdrawn its previously issued guidance for 2014 and expects to provide updated guidance later in the year.
- Credit Agreement Trigger: The invalidation of management certifications regarding financial statements constitutes an event of default under the company's $1 billion credit agreement. Without further agreement from the bank syndicate, KBR is prohibited from requesting new letters of credit or loan advances.
- Collateral Requirements: Under certain circumstances, KBR may be required to provide cash collateral to secure outstanding letters of credit or surety bond positions.
- Client Recoveries: The company believes it is entitled to certain recoveries from clients for cost increases but will only record these if and when mutually agreed upon.
- Internal Controls: The Audit Committee has retained independent legal and accounting advisors to review the matters, and the company is re-evaluating its internal controls over financial reporting.
Investor Verification Checklist
- Verify the final restated figures for 2013 revenue, profit, and tax provisions once the amended Form 10-K is filed.
- Monitor the status of negotiations with the bank syndicate regarding the credit agreement default and potential collateral requirements.
- Track the outcome of discussions with clients regarding market-based cost adjustments for the master services agreement.
- Review the updated 2014 financial guidance when released later in the year.
- Assess the impact of the $158 million charge on the company's overall liquidity and ability to fund operations without new credit facilities.