KBR, Inc. 2012 Form 10-K Summary
Business context and reporting period
KBR is a global engineering, construction and services company serving hydrocarbons, infrastructure, government, power, industrial, minerals and commercial markets through its Hydrocarbons, Infrastructure, Government and Power, Services and Other groups. The filing covers the fiscal year ended December 31, 2012. The request metadata references 2011 Q4, but the supplied document is a 2012 annual Form 10-K and includes quarterly data for 2012 and 2011.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $7.921 billion | $9.261 billion | Down 14% |
| Operating income | $299 million | $587 million | Down 49% |
| Net income attributable to KBR | $144 million | $480 million | Down 70% |
| Diluted EPS | $0.97 | $3.16 | Down 69% |
| Gross operating margin | 3.8% | 6.3% | Down 2.5 percentage points |
| Cash flow from operations | $142 million | $650 million | Down $508 million |
| Capital expenditures | $75 million | $83 million | Down $8 million |
| Cash and equivalents | $1.053 billion | $966 million | Up $87 million |
| Net working capital | $1.391 billion | $1.158 billion | Up $233 million |
| Backlog | $14.931 billion | $10.931 billion | Up 37% |
Net income included $58 million attributable to noncontrolling interests. The effective tax rate was 29.9%, compared with 5.6% in 2011; 2011 benefited from significant discrete tax items. KBR declared $0.28 per share of dividends in 2012, compared with $0.20 in 2011.
At December 31, 2012, KBR had $94 million of nonrecourse project-finance debt and no borrowings under its $1.0 billion revolving credit facility, although $217 million of letters of credit were outstanding under the facility. KBR reported approximately $2.5 billion of committed and uncommitted letter-of-credit capacity, of which $765 million was utilized.
Material changes versus the prior comparable period
- Revenue declined primarily because Iraq LogCAP III operations ended in December 2011, reducing North American Government and Logistics revenue by $1.473 billion, and because Minerals activity and several major hydrocarbons projects declined or neared completion.
- Hydrocarbons revenue increased 1% to $4.300 billion, while segment operating income increased 47% to $601 million, led by Gorgon, Skikda and Ichthys LNG activity and milestone awards.
- IGP revenue fell 43% to $1.904 billion and segment operating income declined to a $104 million loss, compared with $266 million of income in 2011.
- Services revenue increased 3% to $1.633 billion, but segment operating income declined to a $16 million loss from $58 million of income because of higher estimated costs on U.S. construction fixed-price projects.
- Backlog increased by $4.0 billion, primarily from the $5.6 billion Ichthys LNG award. Approximately 48% of backlog was expected to be recognized within one year, and 43% was attributable to fixed-price contracts.
Guidance, outlook, commentary and unusual items
The filing does not provide a specific quantitative earnings or revenue outlook. Management described long-term opportunities in LNG, energy infrastructure, process technology, international infrastructure and Canadian industrial construction. It also expected government-related activity in Iraq, Afghanistan and the Middle East to continue declining as troop levels were reduced, while identifying potential growth from logistics, infrastructure and Middle Eastern government spending.
- KBR recorded a $178 million noncash goodwill impairment charge in the Minerals reporting unit after lower bookings, project losses inherited from the Roberts & Schaefer acquisition and deteriorating minerals-market conditions. Minerals also recorded project costs and liquidated damages associated with two Indonesian projects.
- KBR recorded a $28 million noncash revenue reduction after an adverse U.S. Court of Federal Claims ruling concerning dining-facility costs.
- Asset dispositions generated approximately $127 million of investing cash flow, including a $27 million pretax gain on the sale of the former headquarters campus. A $44 million gain on the sale of the 601 Jefferson building was deferred because KBR continued leasing the property.
- FAO litigation settled for $39 million paid to MWKL; KBR recorded $20 million of additional revenue and $14 million of job income.
- KBR had $219 million of government-contract claims recorded as receivables and considered probable of collection. DCAA Form 1s recommended suspension of approximately $333 million of prior contract costs, with $140 million withheld from current billings.
- The company had a $219 million liability related to the Barracuda-Caratinga arbitration, offset by an indemnification receivable from Halliburton. Halliburton paid the claimant in January 2013.
- The PEMEX arbitration receivable remained classified as long term, with collection timing uncertain. KBR disclosed approximately $80 million of related performance bonds that could be called, but had not recorded a liability for that contingency.
Principal risks and contingencies
- Revenue and cash flow depend on the timing, funding and profitability of large contract awards; backlog may be delayed, modified, suspended or canceled.
- Fixed-price contracts expose KBR to cost overruns, inflation, schedule delays, liquidated damages and project losses.
- Government contracts are subject to audits, cost disallowances, payment withholding, termination, penalties and potential False Claims Act liability.
- International operations expose KBR to political instability, armed conflict, terrorism, currency controls, foreign-exchange volatility and regulatory changes.
- Goodwill and other asset values remain sensitive to minerals-market conditions, project performance, forecast cash flows and valuation assumptions.
- KBR reported substantial pension underfunding, including a combined U.S. and international funded status deficit of approximately $391 million at year-end, and expected approximately $25 million of 2013 pension contributions, subject to U.K. plan discussions.
- Environmental remediation accruals were approximately $6 million, compared with an estimated possible cost of up to $11 million.
- Pending matters included sodium dichromate litigation, burn-pit litigation, government-contract disputes, Halliburton tax-sharing disputes and other subcontractor claims. The sodium dichromate Oregon case had a jury verdict of approximately $10 million in actual damages and $75 million in punitive damages, but no amount was accrued as of year-end because final judgment and appeals remained unresolved.
Most important facts for an investor to verify
- Reconcile the requested 2011 Q4 period with the supplied 2012 annual filing and confirm whether a separate 2011 Form 10-K or Q4 filing is intended.
- Assess whether the $14.9 billion backlog, particularly the Ichthys LNG award, converts to revenue and cash flow as projected and whether the fixed-price mix creates material margin risk.
- Review Minerals project performance, remaining goodwill of $779 million and the potential for additional impairments.
- Evaluate the collectability and timing of the $219 million of government claims and the outcome of DCAA, ASBCA and Court of Federal Claims matters.
- Monitor the PEMEX receivable, the $80 million of performance bonds and the effect of any unfavorable enforcement or collection ruling.
- Review pension funding requirements, Halliburton tax-sharing disputes and other unrecorded or contingent liabilities.
- Confirm liquidity availability after considering restricted joint-venture cash, letters of credit, surety requirements, contractual obligations and potential litigation settlements.