Business Context and Reporting Period
KBR, Inc. (NYSE: KBR), a global engineering, construction, and services company, filed a Form 8-K on February 26, 2008, to announce its Fourth Quarter and Full Year 2007 financial results. The company operates through six business units: Government and Infrastructure, Upstream, Services, Downstream, Technology, and Ventures.
Key Financial Metrics
Fourth Quarter 2007 (vs. Q4 2006)
- Revenue: $2.389 billion (up 4.3% from $2.291 billion).
- Net Income: $71 million ($0.42 per diluted share) vs. $43 million ($0.28 per diluted share).
- Income from Continuing Operations: $48 million ($0.28 per diluted share) vs. $45 million ($0.30 per diluted share).
- Discontinued Operations: $23 million income (primarily tax benefits from the 2006 sale of Production Services) vs. $2 million loss.
- Operating Income: $82 million vs. $90 million.
Full Year 2007 (vs. Full Year 2006)
- Revenue: $8.745 billion (down 0.7% from $8.805 billion).
- Net Income: $302 million ($1.79 per diluted share) vs. $168 million ($1.20 per diluted share).
- Income from Continuing Operations: $182 million ($1.08 per diluted share) vs. $54 million ($0.39 per diluted share).
- Operating Income: $294 million vs. $152 million.
- Cash and Equivalents: $1.861 billion (Dec 31, 2007) vs. $1.410 billion (Dec 31, 2006).
- Operating Cash Flow: $248 million vs. $931 million.
Material Changes and Drivers
- Government and Infrastructure (G&I): Q4 income decreased to $53 million from $88 million, primarily due to a $22 million charge for potentially disallowable costs under U.S. government contracts in the Middle East (LogCAP III) dating from 2003. Full year G&I revenue declined to $6.093 billion from $6.506 billion.
- Upstream: Q4 income was $64 million, driven by gas monetization projects (Skikda LNG) and offshore projects (Kashagan). Full year revenue increased to $1.887 billion from $1.700 billion.
- Discontinued Operations: Full year 2007 included $120 million of income from discontinued operations, largely from the sale of the 51% interest in Devonport Management Limited (DML) and tax benefits.
- Corporate Expenses: Q4 corporate general and administrative expenses dropped to $49 million from $78 million, driven by lower financial systems/SAP implementation costs and the absence of a $5 million restructuring charge present in Q4 2006.
Outlook, Risks, and Management Commentary
CEO Bill Utt described 2007 as a "record year" for profitability, citing strong execution on current projects and new awards. However, he expressed disappointment regarding the $22 million provision in the G&I unit related to the LogCAP III contract. Looking to 2008, management stated KBR is well-positioned to capitalize on growth opportunities.
Backlog: Total backlog for continuing operations was $13.051 billion as of December 31, 2007, an increase from $12.437 billion in 2006. The backlog is composed of 28% fixed-price and 72% cost-reimbursable contracts.
Risks: The filing highlights risks including government audits and investigations, enforceability of indemnities from Halliburton, fixed-fee project cost escalation, claims negotiations, and geopolitical instability.
Investor Verification Checklist
- Verify the status and potential magnitude of the $22 million charge related to "potentially disallowable costs" under the LogCAP III contract.
- Confirm the sustainability of the $120 million income from discontinued operations, noting it was largely a one-time tax benefit and asset sale.
- Review the composition of the $13.051 billion backlog, specifically the 28% fixed-price portion, to assess exposure to cost overruns.
- Monitor the decline in operating cash flow ($931M in 2006 to $248M in 2007) and its impact on liquidity.
- Assess the impact of the $22 million charge on future government contract profitability and potential for further provisions.