KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The request metadata identifies “2012 Q4,” but the supplied filing is KBR’s annual Form 10-K for fiscal 2013, filed February 27, 2014.
Business context
KBR is a global engineering, procurement, construction, technology licensing, operations and maintenance company serving energy, hydrocarbons, power, infrastructure, minerals, government and industrial markets in more than 70 countries. Its reportable segments are Gas Monetization, Hydrocarbons, Infrastructure, Government and Power, Services and Other. KBR reorganized its reporting structure in the third quarter of 2013 by separating Gas Monetization from Hydrocarbons and recasting prior periods.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $7.283 billion | $7.770 billion | Down 6% |
| Gross profit | $581 million | $518 million | Up 12% |
| Gross margin | 8.0% | 6.7% | Up approximately 130 bps |
| Operating income | $471 million | $299 million | Up 58% |
| Operating margin | 6.5% | 3.8% | Up approximately 270 bps |
| Net income attributable to KBR | $229 million | $144 million | Up 59% |
| Diluted EPS | $1.54 | $0.97 | Up $0.57 |
| Operating cash flow | $290 million | $142 million | Up $148 million |
| Cash and equivalents | $1.099 billion | $1.053 billion | Up $46 million |
| Backlog | $14.414 billion | $14.931 billion | Down 3% |
2013 cash flow included a $108 million payment on performance bonds related to the Mexico EPC 1 dispute. Excluding that payment, operating cash generation would have been materially higher, although the filing does not present an adjusted operating cash flow figure.
Debt was limited primarily to $88 million of nonrecourse project-finance debt associated with a consolidated Fasttrax variable-interest entity. KBR had no cash borrowings under its $1.0 billion revolving credit facility at year-end, although $226 million of letters of credit were outstanding under that facility. Total letters of credit outstanding under all lines were $687 million against approximately $2.2 billion of capacity.
Total assets were $5.516 billion and total shareholders’ equity was $2.595 billion at December 31, 2013. Goodwill was $772 million and intangible assets were $85 million. Pension obligations totaled $477 million, and KBR expected to contribute approximately $46 million to its international pension plan in 2014.
Material changes versus prior comparable period
- Revenue declined primarily because Gas Monetization projects in Nigeria and Algeria completed or neared completion and IGP activity declined with the U.S. government’s drawdown from Iraq.
- Hydrocarbons revenue increased 18% to $1.482 billion, but gross profit declined modestly because of a greater mix of lower-margin EPC construction work and the absence of a 2012 claim-settlement benefit.
- Services revenue increased 28% to $2.051 billion, primarily from oil-sands-related construction in western Canada. The segment returned to $57 million of gross profit from a $49 million loss in 2012.
- IGP revenue declined 17% to $1.535 billion, but gross profit increased to $65 million from $20 million as 2012 Indonesian project losses, liquidated damages and a U.S. government contract charge did not recur.
- Gas Monetization revenue decreased 28% to $2.155 billion and gross profit fell to $324 million from $381 million. The 2013 result included a $25 million correction of a prior-period foreign-currency accounting error and approximately $20 million of other project charges, partially offset by a $71 million Australian LNG change-order benefit.
- Operating income benefited from the absence of the $180 million of goodwill and long-lived-asset impairment charges recorded in 2012, including a $178 million IGP goodwill impairment.
- KBR recorded a $10 million fourth-quarter reduction-in-force charge and incurred $41 million of ERP-related expense in 2013, in addition to $53 million of ERP capital expenditures.
- Backlog composition shifted: Gas Monetization backlog fell to $6.158 billion from $7.745 billion, while Hydrocarbons backlog rose to $2.619 billion from $1.354 billion and Services backlog increased to $2.544 billion from $2.025 billion.
Guidance, outlook, risks and unusual items
- Management expected the two major Australian LNG projects to continue through 2014, but did not expect major Gas Monetization EPC awards until 2015 or later, implying continued pressure on that segment’s backlog.
- Management expected global hydrocarbons markets and western Canadian construction services to remain areas of strength in 2014, while government, mining and APAC infrastructure markets remained challenging.
- Approximately 49% of backlog was expected to convert to revenue within one year. Approximately 43% of backlog was fixed-price, exposing KBR to cost overruns, schedule delays and liquidated damages.
- KBR recognized $401 million of long-term claims and accounts receivable related to the Mexico EPC 1 arbitration and expected recovery from PEMEX/PEP. Collection timing remained uncertain and was subject to appeals and enforcement proceedings.
- U.S. government matters included $276 million of questioned billings under Form 1 procedures, $138 million of withheld payments, and a $76 million accrued probable-loss estimate. Government audits, litigation, potential False Claims Act exposure and contract closeout could affect cash flow and earnings.
- The company disclosed six active qui tam matters and continuing litigation involving Iraq-related contracts, burn pits and sodium dichromate exposure. Management generally assessed losses beyond recorded accruals as remote, but outcomes remain uncertain.
- KBR recorded a $105 million payable to former parent Halliburton after an accounting referee ruling under the tax sharing agreement. The related tax impact included a $38 million tax charge.
- Environmental remediation accruals were approximately $2 million, with an additional possible $1 million not accrued. The filing states that the ultimate responsibility for certain cleanup actions remains uncertain.
- KPMG issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. The material weakness involved controls over foreign-currency effects in estimates of revenue, costs and profit at completion on certain long-term construction projects. KBR planned remediation during 2014.
- Goodwill impairment testing identified one IGP reporting unit whose carrying value exceeded fair value, but the implied goodwill fair value exceeded carrying value by approximately $5 million. Future deterioration in market conditions or project awards could cause an impairment.
Most important facts for investors to verify
- Whether the $401 million PEMEX/PEP claim, including reimbursement of the $108 million performance-bond payment, is ultimately collected and on what timetable.
- Progress in remediating the disclosed material weakness and whether subsequent filings report effective internal controls.
- Conversion, profitability and cancellation risk within the $14.4 billion backlog, particularly the fixed-price portion and unconsolidated-joint-venture backlog.
- Gas Monetization award activity after the expected 2014 backlog decline and the timing of new LNG or GTL EPC awards.
- Resolution of U.S. government audits, Form 1 disputes, claims and False Claims Act or qui tam matters.
- Exposure to future IGP goodwill impairment, pension funding requirements, foreign-currency movements and the $105 million Halliburton-related payable.
- Whether cash balances held internationally or in joint ventures are readily available for corporate liquidity and whether repatriation taxes or local restrictions apply.