KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010; filed February 23, 2011. The request metadata identifies “2009 Q4,” but the supplied filing is KBR’s 2010 Form 10-K and includes quarterly data for 2010 and 2009.
Business context
KBR is a global engineering, construction and services company serving hydrocarbons, government, infrastructure, power, industrial and civil infrastructure markets. Reportable segments are Hydrocarbons, Infrastructure, Government and Power (IGP), Services and Other. Operations covered more than 65 countries; international operations generated 79% of consolidated revenue in 2010.
The U.S. government remained KBR’s largest customer, contributing $3.3 billion, or 32% of revenue. Chevron contributed $1.8 billion, or 18%. Revenue from Iraq declined to 29% of consolidated revenue from 35% in 2009.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $10.099 billion | $12.105 billion | Down 17% |
| Operating income | $609 million | $536 million | Up 14% |
| Operating margin | 6.0% | 4.4% | Up 160 basis points |
| Net income attributable to KBR | $327 million | $290 million | Up 13% |
| Diluted EPS | $2.07 | $1.79 | Up 16% |
| Cash flow from operations | $549 million | $(36) million | Improved by $585 million |
| Capital expenditures | $66 million | $41 million | Up $25 million |
| Year-end cash and equivalents | $786 million | $941 million | Down $155 million |
| Backlog | $12.041 billion | $14.098 billion | Down 15% |
Net income was $395 million, including $68 million attributable to noncontrolling interests. The effective tax rate was 32.6%, compared with 31.5% in 2009. Net interest expense increased to $17 million from $1 million.
At December 31, 2010, KBR had no borrowings under its $1.1 billion revolving credit facility and had $278 million of letters of credit outstanding under that facility. Total letters of credit outstanding on KBR lines were $623 million, supported by approximately $1.9 billion of committed and uncommitted capacity. KBR was in compliance with its debt covenants.
Material changes versus prior comparable period
- Revenue fell primarily because IGP revenue declined $1.989 billion, including a $1.882 billion decline in North American Government and Defense. LogCAP III activity decreased as U.S. military operations in Iraq contracted and work transitioned to the multiple-award LogCAP IV contract.
- Hydrocarbons revenue increased 2% to $3.969 billion, led by Gas Monetization and Downstream. Hydrocarbons operating segment income declined to $400 million from $464 million because the 2009 result included a favorable $183 million EPC 1 arbitration-related operating gain.
- IGP operating segment income increased to $272 million from $188 million, benefiting from $94 million of LogCAP III award fees recognized in 2010. This benefit was partly offset by lower contract volume and $23 million of potentially unallowable-cost charges.
- Services revenue declined 6% to $1.755 billion, while segment income increased modestly to $102 million.
- Backlog declined by approximately $2.1 billion. Hydrocarbons backlog fell to $6.560 billion and IGP backlog to $2.889 billion; 55% of total backlog was expected to be recognized within one year.
- KBR acquired Roberts & Schaefer through ENI for approximately $289 million of net cash at closing and acquired Energo Engineering for approximately $16 million. KBR also obtained the remaining 44.94% interest in M.W. Kellogg Limited, recording a $180 million obligation to the former noncontrolling shareholder.
- KBR completed a $233 million repurchase of approximately 10 million shares and declared $23 million of dividends. The annual dividend declined to $0.15 per share from $0.20.
Outlook, risks and unusual items
- Management expected continued declines in LogCAP III volume during 2011 as Iraq operations wound down and work shifted to LogCAP IV. KBR stated that construction and maintenance markets and several Services markets were improving, with more bid requests and feasibility activity.
- LogCAP III award fees became less predictable after the U.S. Army denied fees for an earlier performance period. KBR recognized $60 million and $34 million of award fees in 2010 and will recognize future service-contract award fees only when awarded.
- U.S. government contract audits remained material. Open DCAA Form 1 notices recommended suspension of approximately $319 million of costs; approximately $160 million had been withheld from current billings. KBR also had $84 million of government demand letters for disallowed costs.
- Government-contract claims included $163 million of unapproved claims recognized as probable of collection. Recovery timing and ultimate collectability remain important liquidity considerations.
- Major contingencies included False Claims Act litigation concerning private-security costs, LogCAP subcontractor arbitrations, burn-pit and convoy litigation, and other Iraq-related claims. Several matters had no accrued amount because KBR could not estimate a probable loss.
- KBR recorded a $5 million fourth-quarter impairment charge on long-lived assets and a $5 million charge related to an arbitration award involving a subcontractor. Environmental remediation accruals were approximately $7 million, with possible costs estimated at up to $14 million.
- Pension plans were underfunded by approximately $268 million at year-end, principally in international plans. KBR expected approximately $68 million of pension contributions in 2011 and reported $538 million of unrecognized actuarial loss.
- Goodwill increased to $947 million, including $250 million from the Roberts & Schaefer acquisition. No goodwill impairment was recorded in 2010, but certain reporting units were sensitive to competitive conditions and execution risks.
Most important facts to verify
- Whether LogCAP IV task-order awards and the continuing LogCAP III wind-down offset the expected government-services revenue decline.
- The collectability and timing of the $356 million-plus PEMEX arbitration judgment, which remained classified as a long-term receivable.
- Potential additional government-contract disallowances, including the $319 million of open Form 1 matters and $84 million of demand letters.
- Resolution and financial exposure from False Claims Act, subcontractor, burn-pit, convoy and other Iraq-related litigation.
- Backlog conversion, cancellations and profitability, particularly the $6.56 billion Hydrocarbons backlog and the proportion expected to be executed within one year.
- Liquidity after acquisitions, share repurchases, pension contributions, letters of credit, the $180 million MWKL obligation and other contractual commitments.
- Future pension funding needs and sensitivity to discount rates, asset returns and foreign exchange movements.