KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The request metadata references “2010 Q4,” but the supplied filing is KBR’s 2011 Form 10-K, filed February 22, 2012.
Business context
KBR is a global engineering, construction and services company serving hydrocarbons, infrastructure, government, power, minerals, industrial and commercial markets. Its reportable segments are Hydrocarbons, Infrastructure, Government and Power (IGP), Services and Other. Operations span more than 70 countries; non-U.S. activities generated 78% of 2011 revenue.
- Hydrocarbons includes LNG, GTL, oil and gas, refining, petrochemical and process-technology projects.
- IGP provides government logistics, defense support, infrastructure, minerals and power services.
- Services provides construction, maintenance, fabrication and building services.
- The U.S. government accounted for 24% of revenue, down from 32% in 2010; Chevron accounted for 22%, up from 18%.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $9.261 billion | $10.099 billion | Down 8% |
| Operating income | $587 million | $609 million | Down 4% |
| Net income | $540 million | $395 million | Up 37% |
| Net income attributable to KBR | $480 million | $327 million | Up 47% |
| Diluted EPS | $3.16 | $2.07 | Up 53% |
| Gross operating margin | 6.3% | 6.0% | Up 30 basis points |
| Operating cash flow | $650 million | $549 million | Up $101 million |
| Capital expenditures | $83 million | $66 million | Up $17 million |
| Cash and equivalents | $966 million | $786 million | Up $180 million |
| Net working capital | $1.158 billion | $923 million | Up $235 million |
| Total shareholders’ equity | $2.442 billion | $2.204 billion | Up $238 million |
Reported net income benefited from a substantially lower effective tax rate of 5.6%, compared with 32.6% in 2010. The 2011 rate included approximately $69 million of tax benefit related to the Barracuda-Caratinga arbitration indemnification and approximately $32 million related to deferred-tax liabilities associated with an Australian joint venture liquidation. Excluding discrete items, management reported an effective tax rate of approximately 29.3%.
Segment results and material changes
- Hydrocarbons: Revenue increased 7% to $4.258 billion and segment operating income increased 2% to $408 million. Growth was driven primarily by progress on the Gorgon LNG and Escravos GTL projects, new oil and gas technical-service work and higher Technology activity.
- IGP: Revenue declined 23% to $3.328 billion and segment operating income declined 2% to $266 million. NAGL revenue fell $1.109 billion, primarily because of the U.S. military drawdown and the effective completion of LogCAP III operations in Iraq. Infrastructure and Minerals revenue increased 88%, partly due to the R&S acquisition.
- Services: Revenue declined 9% to $1.590 billion and segment operating income fell 43% to $58 million, reflecting completion or winding down of major U.S. and Canadian projects.
- Other and Ventures: Revenue increased modestly, while segment operating income increased to $51 million from $35 million, helped by improved performance at the EBIC ammonia plant and other venture activities.
- Backlog: Backlog declined to $10.931 billion from $12.041 billion. Approximately 59% was expected to convert to revenue within one year. About 25% was fixed-price and 75% cost-reimbursable.
- Shareholder returns: KBR repurchased approximately $118 million of common stock, or approximately 4 million shares, and declared $30 million of dividends in 2011. The August 2011 authorization allowed repurchases of up to 10 million shares; approximately 7.976 million remained available at December 31, 2011.
Cash flow, debt and liquidity
- Operating cash flow was $650 million, supported by earnings, collections and $182 million of distributions from unconsolidated affiliates. Cash taxes were approximately $201 million and pension contributions were approximately $74 million.
- Investing cash outflow was $88 million, primarily $83 million of capital expenditures. The prior year included approximately $299 million of net cash acquisitions.
- Financing cash outflow was $377 million, including $178 million to acquire the remaining MWKL noncontrolling interest, $118 million of share repurchases, $63 million of distributions to noncontrolling interests and $30 million of dividends.
- On December 2, 2011, KBR entered into a new $1 billion unsecured revolving credit agreement expiring in December 2016. At year-end, no borrowings were outstanding and $245 million of letters of credit had been issued under the facility.
- Consolidated non-recourse project-finance debt was $98 million, related to Fasttrax Limited and non-recourse to KBR.
- KBR reported approximately $1.8 billion of committed and uncommitted letter-of-credit capacity, of which $635 million had been utilized. Management stated that liquidity, letter-of-credit capacity and surety-bond capacity were adequate for current operations and backlog for the next twelve months.
Outlook, commentary, risks and unusual items
- Management expected continued long-term opportunities in LNG, offshore oil and gas, process technologies, mining, minerals, infrastructure, power and international government services.
- Management expected the volume of U.S. and U.K. contingency work in the Middle East to continue declining over the next several years as military operations wind down. The LogCAP III Iraq scope effectively ended in December 2011, with residual tasks expected into early 2012.
- KBR planned to report Infrastructure and Minerals as separate business units in 2012, with the R&S business included in Minerals.
- Principal risks include fixed-price cost overruns, project delays, liquidated damages, claims and disputes, dependence on government spending, contract audits and potential disallowance of government costs, commodity-market cycles, international political and security conditions, foreign exchange, joint-venture performance and access to bonding or letters of credit.
- Open DCAA Form 1 matters recommended suspension of approximately $361 million of prior contract costs; approximately $150 million had been withheld from current billings. KBR also faced customer demand letters for $87 million of disallowed costs.
- Government-contract receivables included $161 million of unapproved claims recognized as probable of collection. The filing states that outcomes of several audits, claims and litigation remain uncertain.
- The Barracuda-Caratinga arbitration resulted in a $197 million recorded liability and an equal indemnification receivable from Halliburton. KBR challenged the award, while Halliburton’s indemnity was expected to cover the liability.
- The company recorded $19 million for the Event Source litigation, paid in January 2012. Other burn-pit, sodium-dichromate, electrocution, False Claims Act and subcontractor matters remained unresolved or were not estimable.
- Environmental remediation accruals were approximately $7 million, compared with possible costs of up to approximately $11 million.
- Pension plans were underfunded by approximately $330 million at year-end, primarily in international plans. KBR expected approximately $30 million of pension contributions in 2012.
- The filing contains an unqualified audit opinion and an unqualified opinion on the effectiveness of internal control over financial reporting.
Most important facts for investors to verify
- Whether the decline in LogCAP and other contingency revenue is being replaced by Hydrocarbons, Minerals, Power and international infrastructure awards.
- The conversion, renewal and profitability of the $10.9 billion backlog, particularly the $4.973 billion Hydrocarbons backlog and fixed-price exposure.
- Cash conversion and the sustainability of operating cash flow, including the portion of cash held by consolidated joint ventures and the collection of unapproved government claims.
- Resolution and cash impact of DCAA audits, government withholds, False Claims Act proceedings and related subcontractor disputes.
- Collectability and timing of the $197 million Halliburton indemnification receivable and the outcome of the Barracuda-Caratinga challenge.
- Status of the PEMEX arbitration receivable, related $80 million performance bonds and the Mexican and U.S. proceedings.
- Compliance with the new credit agreement’s leverage and net-worth covenants, as well as available letter-of-credit and bonding capacity.
- Progress in recovering Services margins and avoiding impairment of the $951 million goodwill balance, particularly the Services reporting unit, whose fair value exceeded carrying value by approximately 4%.
- Actual 2012 pension contributions and the effect of lower discount rates and accumulated actuarial losses on future earnings and equity.