KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009; filed February 25, 2010. The request metadata references 2008 Q4, but the supplied filing is KBR’s 2009 Form 10-K and includes fourth-quarter 2009 data.
Business Context
KBR is a global engineering, construction and services company operating through Government and Infrastructure, Upstream, Services, Downstream, Technology and Ventures businesses. It serves government, energy, hydrocarbon, industrial, power, minerals and civil infrastructure customers in more than 45 countries.
International operations generated 79% of 2009 revenue, including 35% from Iraq. The U.S. government accounted for $5.2 billion, or 43% of consolidated revenue, compared with 53% in 2008. KBR had more than 51,000 employees at year-end.
Financial Results and Position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $12.105 billion | $11.581 billion | +5% |
| Operating income | $536 million | $541 million | -1% |
| Net income attributable to KBR | $290 million | $319 million | -9% |
| Diluted EPS | $1.79 | $1.90 | -6% |
| Gross operating margin | 4.4% | 4.7% | Down 0.3 points |
| Operating cash flow | $(36) million | $124 million | Declined $160 million |
| Capital expenditures | $41 million | $37 million | +11% |
| Cash and equivalents | $941 million | $1.145 billion | Down $204 million |
| Net working capital | $1.350 billion | $1.099 billion | +23% |
| Total debt | No balance-sheet debt reported | No balance-sheet debt reported | — |
| Total shareholders’ equity | $2.296 billion | $2.034 billion | +13% |
| Backlog | $14.098 billion | $14.097 billion | Flat |
Upstream revenue increased 24% to $3.330 billion and Services revenue increased 65% to $2.266 billion, primarily reflecting LNG/GTL project activity and the BE&K acquisition. Government and Infrastructure revenue decreased 15% to $5.879 billion as Iraq-related LogCAP III activity declined.
Backlog was essentially unchanged at $14.1 billion. Approximately 55% was expected to be completed within one year; 82% was cost-reimbursable and 18% fixed-price. Upstream represented $7.085 billion of backlog, while Government and Infrastructure backlog declined to $3.015 billion from $3.474 billion.
The company had a new $1.1 billion unsecured revolving credit facility expiring in November 2012. There were no cash borrowings at year-end and $371 million of letters of credit outstanding under the facility. Total KBR credit capacity supporting letters of credit was $1.5 billion, of which $497 million was utilized. KBR reported compliance with its debt covenants.
Material Changes Versus the Prior Period
- Revenue grew $524 million, driven by Upstream and Services, but operating income declined slightly and net income attributable to KBR fell $29 million.
- Government and Infrastructure income declined 58% to $141 million. LogCAP III Middle East revenue fell $680 million, and staffing on the project declined approximately 17%.
- Upstream income increased 55% to $406 million, including $183 million of operating income from a $351 million favorable EPC 1 arbitration award against PEMEX.
- Services income increased 31% to $144 million, benefiting from the full-year contribution of BE&K, acquired in July 2008 for approximately $559 million.
- Operating cash flow turned negative because of working-capital investment, including approximately $220 million related to the Skikda LNG project.
- The company recognized a $6 million goodwill impairment charge for a BE&K-related staffing business and reduced goodwill to $691 million.
- KBR corrected prior-period errors in the fourth quarter, reducing fourth-quarter net income by approximately $12 million after tax, or approximately $0.08 per share. The company concluded the errors were not material to previously issued annual financial statements.
Outlook, Risks and Unusual Items
Management expected continued decline in LogCAP III activity as U.S. military operations in Iraq decreased and work transitioned to LogCAP IV, a multiple-award contract. KBR had not been awarded new LogCAP IV work as of the filing. Management expected stronger North American markets in 2010, but anticipated smaller bid opportunities and increased competition. The company projected a 2010 tax rate of approximately 35% and capital expenditures of approximately $62 million.
On February 19, 2010, the LogCAP III award-fee official denied approximately $20 million of previously accrued fees for January-April 2008 and caused KBR to reverse approximately $112 million of additional accrued fees for later open performance periods. The filing states that future revenue and earnings could increase if subsequent award fees are granted.
Significant contingencies include DCAA Form 1 notices recommending suspension of approximately $289 million of prior contract costs, of which $152 million had been withheld from billings, and customer demands to remit $121 million of disapproved costs. KBR also reported $113 million of unapproved government contract claims recognized as probable of collection.
KBR’s subsidiary pleaded guilty to FCPA violations related to the Bonny Island, Nigeria project. KBR was responsible for $20 million of a $402 million DOJ criminal penalty; Halliburton was obligated to pay the remaining $382 million and the $177 million SEC settlement under indemnification arrangements. Foreign investigations continued, including a U.K. Serious Fraud Office investigation, and debarment risks remained.
Other material exposures include the Barracuda-Caratinga subsea-bolt arbitration, for which Petrobras claimed $220 million plus interest; 43 burn-pit lawsuits; convoy-ambush litigation scheduled for trial in 2010; a $134 million First Kuwaiti arbitration claim; and potential liquidated damages of $18 million that had not been accrued. Management stated that several Halliburton indemnities were expected to mitigate certain exposures, but the filing cautioned that indemnities may not cover all losses or be enforceable in every circumstance.
Pension plans had a combined funded-status obligation of approximately $320 million at year-end. KBR contributed $23 million in 2009 and expected approximately $14 million of 2010 contributions, subject to the outcome of a U.K. pension valuation.
Investor Verification Items
- Reconcile the filing’s 2009 annual results with the fourth-quarter impact of the $12 million after-tax error correction and the LogCAP award-fee reversals.
- Verify the timing, collectibility and accounting treatment of the $351 million PEMEX arbitration award and related $117 million after-tax benefit.
- Monitor LogCAP III runoff, LogCAP IV task-order awards and the effect of declining U.S. government revenue concentration.
- Assess potential cash exposure from DCAA suspensions, disallowed costs, unapproved claims and related subcontractor disputes.
- Review the scope and enforceability of Halliburton indemnities for FCPA, Barracuda-Caratinga and other legacy matters.
- Evaluate project execution risk in fixed-price contracts, LNG/GTL projects nearing completion, joint ventures and potential liquidated damages.
- Confirm liquidity after considering restricted and project-specific cash, letters of credit, pension funding, legal contingencies and the $1.1 billion revolving facility covenants.