KBR, Inc. 2015 Form 10-K Summary
Reporting period: The supplied filing is KBR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed February 26, 2016. The request metadata references 2014 Q4, but the filing contains full-year 2015 results and comparative quarterly data for 2014 and 2015.
Business context
KBR is a global engineering, procurement, construction and services company operating in approximately 70 countries. Its core segments are Technology & Consulting, Engineering & Construction, and Government Services, with Non-strategic Business activities being wound down. International operations generated 57% of 2015 revenue. KBR’s major end markets include hydrocarbons, LNG, refining, petrochemicals, chemicals and government services.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $5.096 billion | $6.366 billion | Down 20% |
| Gross profit (loss) | $325 million | $(65) million | Improved $390 million |
| Operating income (loss) | $310 million | $(794) million | Improved $1.104 billion |
| Net income (loss) attributable to KBR | $203 million | $(1.262) billion | Returned to profitability |
| diluted EPS | $1.40 | $(8.66) | Improved |
| Operating cash flow | $47 million | $170 million | Down $123 million |
| Cash and equivalents | $883 million | $970 million | Down $87 million |
| Total shareholders’ equity | $1.052 billion | $935 million | Up $117 million |
| Backlog | $12.333 billion | $10.859 billion | Up 14% |
Gross margin was approximately 6.4% in 2015 compared with negative 1.0% in 2014. Operating margin was approximately 6.1% versus negative 12.5% in 2014. The filing does not provide a consolidated EBITDA figure.
At December 31, 2015, KBR had no cash borrowings under its new $1 billion unsecured revolving credit facility, which matures in September 2020, and had $127 million of letters of credit outstanding under the facility. Total letters of credit outstanding were $593 million against approximately $2.2 billion of committed and uncommitted capacity. KBR was in compliance with its financial covenants.
Cash flow was supported by $92 million of distributions from unconsolidated affiliates and $130 million of proceeds from asset and investment sales. Financing uses included $62 million of share repurchases, $47 million of dividends, $40 million for a noncontrolling-interest acquisition and $11 million of debt repayments. Nonrecourse project-finance debt totaled $61 million.
Material changes versus the prior comparable period
- Revenue declined primarily because a major Australian LNG project approached completion, several projects were completed or substantially completed, and certain businesses were sold or deconsolidated.
- Engineering & Construction revenue declined 25% to $3.454 billion, but gross profit increased 59% to $224 million, reflecting project settlements, improved Canadian project performance and lower overhead.
- Technology & Consulting revenue declined 8% to $324 million, while gross profit increased 45% to $77 million due to project mix, license milestones and cost reductions.
- Government Services revenue increased 4% to $663 million, and its gross loss narrowed to $3 million from $32 million, although legal costs related to legacy contracts remained significant.
- Non-strategic Business revenue declined 17% to $655 million, but gross profit improved to $27 million from a $227 million loss.
- General and administrative expense decreased to $155 million from $239 million, reflecting headcount reductions, lower overhead and cancellation of the ERP implementation project.
- 2015 included $70 million of asset impairment and restructuring charges but no goodwill impairment. In contrast, 2014 included a $446 million goodwill impairment charge, $171 million of asset impairments and $43 million of restructuring charges, plus approximately $421 million of tax expense related primarily to valuation allowances.
- KBR sold its Building Group and Infrastructure Americas businesses, sold two office facilities, formed the Brown & Root Industrial Services joint venture and acquired a minority interest in EPIC Piping.
Fourth-quarter information
For the fourth quarter of 2015, revenue was $1.080 billion, gross profit was $94 million, operating income was $75 million, net income attributable to KBR was $42 million and diluted EPS was $0.29. For the fourth quarter of 2014, revenue was $1.417 billion, gross profit was $(162) million, operating loss was $(839) million, net loss attributable to KBR was $(1.241) billion and diluted EPS was $(8.57).
Outlook, risks and unusual items
- Management expected the business transformation and cost-reduction program to be substantially completed by the end of 2016. More than $165 million of a targeted $200 million in annualized savings had been identified and implemented.
- Management cited opportunities in LNG, floating LNG, downstream U.S. infrastructure, chemicals, ammonia and recurring government-services contracts. A major U.K. Ministry of Defence training-systems contract was awarded in January 2016.
- Low oil and gas prices were causing customers to defer, suspend or reduce capital spending, particularly in upstream markets. This creates risks for new awards, backlog replacement and future E&C margins.
- Backlog increased to $12.333 billion, but 49% related to service concession arrangements and the company changed its backlog policy in 2015 to include forecast work beyond five years. Approximately 38% was expected to convert to revenue within one year and 22% was fixed-price.
- A remaining power project generated a $47 million loss reserve at year-end and was expected to be completed in 2017. Actual costs could differ from estimates.
- Legacy U.S. government matters remained material. LogCAP III closeout was expected to continue through at least 2017; $173 million of Form 1s remained outstanding, with $83 million withheld by the government. Approximately $50 million was reserved for unallowable costs.
- KBR recorded $400 million of long-term claims receivable related to the PEMEX/PEP arbitration. Collection timing remained uncertain despite $465 million of cash collateral posted in U.S. proceedings.
- The company had $333 million of pension obligations on its balance sheet and expected to contribute $41 million to its international pension plan in 2016. Unrecognized pretax actuarial losses were $769 million.
- Key risks include fixed-price contract cost overruns, project claims and disputes, joint-venture performance, government audits and contract termination, international political and security conditions, foreign-exchange volatility, customer concentration, commodity-price cycles, tax contingencies and litigation.
Most important facts for investors to verify
- Whether backlog growth, including the 2015 service-concession policy change, converts into profitable revenue and cash flow.
- Progress and final cash requirements for the remaining power project and other loss-making or fixed-price contracts.
- Collection timing and legal outcomes for the $400 million PEMEX/PEP arbitration receivable.
- Resolution of LogCAP III audits, Form 1s, qui tam matters and other U.S. government claims.
- Sustainability of improved E&C and Non-strategic Business margins after project settlements and other unusual items.
- Impact of low oil and gas prices on new awards, customer capital spending and future backlog.
- Funding requirements for pension obligations and the realizability of deferred tax assets subject to a $542 million valuation allowance.
- Liquidity available after dividends, share repurchases, letters of credit, pension funding and potential litigation or contract-related payments.