There is no discussion of physical property rights in the annual report, and no insight is provided into physical property rights in a search of online resources either.
Corporate Social Responsibility Efforts
KBR generally has a poor CSR record. In recent years, the company has become embroiled in a number of scandals relating to its operations in the Middle East in particular. In addition to accusations of shoddy workmanship causing deaths, rape and subsequent cover-up, and human trafficking, the company has also committed environmental violations regarding so-called "burn pits" that contained a number of toxic chemicals to which American soldiers were exposed (Wise & Olsen, 2010), has come under fire for essentially embezzling $12 billion (Newton-Small, 2007), and has been charged under the Foreign Corrupt Practices Act for bribery in Nigeria (CNN, 2009). Over the past ten years, therefore, there is a profound pattern of lacking any semblance of corporate social responsibility at KBR.
The company's has instituted a Code of Business Conduct that covers a wide range of subjects including conflict of interest, bribery, improper payments, disclosure of material non-public information, fraud and ethical business practices (KBR.com, Summary of the Code). There are also edicts on harassment, health and safety, political contributions and ethics training (Ibid). The company has set up an Ethics Hotline to facilitate the reporting of violations. The hotline is operated by an independent company and allows for anonymity. Translators are also available, assisting with foreign employees or those for whom English is not a first language (KBR.com, Code of Business Conduct).
The Code of Conduct does not cover some of the grossest violations of which the company has been accused. In addition, the company has preferred to fight allegations and cover-up major issues rather than address them head-on. There appears to be a certain degree of intransigence inside senior management with regards to ethical violations and criminal acts. For the most part, it does not appear that CSR issues are dealt with unless there is a media firestorm and the company does not appear to be particularly proactive at changing the organizational culture that has allowed for these violations of the past ten years to occur.
KBR's stock is presently trading near its 52-week high. The company was spun off at $21 and jumped on debut day to $24.77. This was following expectations of an IPO in the $17 range (Kirdahy, 2006). The stock rose to nearly $40 by November of 2007, but fell since that point. The stock has generally been on the rise since early 2009, more than doubling in that time (MSN Moneycentral, KBR).
KBR generally has good financial metrics. The current ratio is currently 1.59, compared with 1.36 in 2008 and 1.54 in 2007. The quick ratio is 1.24 compared with 1.08 in 2008 and 1.37 in 2007. The cash ratio is 0.41 compared with 0.37 in 2008 and 0.71 in 2007. These figures are all healthy and for the most part represent improvement over the past couple of years in the company's liquidity. With respect to long-term solvency, KBR carries a debt ratio of 0.57 for 2009, 0.65 in 2008 and 0.56 in 2007. The company has generally reduced its reliance on debt financing over the past five years. KBR holds no long-term debt and has not had any on the balance sheet since 2005. The firm's equity level, however, is stuck at 2007 levels. This indicates that the company is essentially in a holding pattern. That it was able to acquire a large competitor without adding long-term debt is perhaps the best indicator of this company's long-term financial health.
KBR operates on tight margins. The firm's gross margin in 2009 was 5.9%, compared with 5.8% in 2008 and 4.8% in 2007. Despite this, low levels of overhead have allowed KBR to remain profitable. The net margin in 2009 was 2.4%, compared with 2.8% in 2008 and 3.5% in 2007. These figures indicate that there has been a slight decline in the company's net margin despite improvements in the gross margin. Selling, general and administrative expenses have declined, but income taxes have increased. It is worth noting that the increase in income tax provisions coincides with the company's income tax evasion scandal.
In terms of operating efficiency, KBR recorded a receivables turnover of 6.0 in 2009, compared with 5.9 in 2008 and 4.8 in 2007. Asset turnover was 2.1 times in 2009, 2.1 times in 2008 and 1.6 times in 2007. This indicates that the company is making more efficient use of its assets in recent years. There is no inventory on its balance sheet, so no inventory turn could be calculated. The company's return on equity is 14.0%, its return on assets is 7.0% and its return on invested capital is 12.5%. These figures are part of a general trend of improvements over the past ten years (MSN Moneycentral, Key Ratios). In that time, the company has generally improved its book value per share, and has seen significant fluctuations in its price/earnings ratio. At present, the P/E is 17.56, which is higher than the 2009 average.
Overall, KBR believes that it will face challenges in the next few years associated primarily with the winding down of U.S. military operations in Iraq and Afghanistan. This will reduce the number and size of contract opportunities in these countries, and consequently the revenues that KBR can earn from these operations (2009 Annual Report, 1). The company believes, however, that it has other revenue streams in place that can help to offset the loss of Afghanistan and Iraq revenues.
The economic and political climates are poor. Cuts in defense spending are imminent, which could impact on revenues for the company. In addition, economic growth is likely to be stifled on the basis of current economic strategies. Tax breaks for billionaires and cuts to other areas of the federal budget do nothing to help KBR, which relies on federal government contracts for a significant portion of its business. Given that similar cuts have already been enacted by another key customer -- the United Kingdom -- KBR is facing threats to two of its most important revenue streams. The ability of the company to continue growing in the future rests almost entirely on its ability to leverage the new opportunities that management believes the company has in Australia, Nigeria and Canada among others.
The company also faces challenges with respect to its ongoing ethics issues. While it continues to receive contracts from the U.S. military, it has also lost contracts recently as well. In general, the company was able to win no-bid contracts during the Bush administration, but that is not the case under the Obama Administration. Competition for Department of Defense contracts is now tough, which will continue to eat into KBR's revenue streams. That said, the company has a strong financial position. It has a new low-interest revolving credit facility that will keep it from taking on long-term debt for another three years. This gives KBR considerable financial strength going forward, in particular to reinvest in other growing areas of business. While the company may be spreading itself thin by having so many businesses, this becoming a problem is purely hypothetical at this point. Overall, it is expected that KBR will continue with its current path of moderate success, but without any increase in dividends the upside of its stock price may be tapped already. The current P/E is relatively high for a firm with uncertain future revenue growth. That the company has tight margins makes it all the more difficult to determine where it can improve profits, since cost cutting is not likely going to yield much opportunity. However, given the high level of experience that KBR has internationally, including in some very difficult countries, the company can find growth anywhere in the world in which it might exist, which is encouraging.
Appendix a: Stock Chart for KBR since IPO (Yahoo Finance)
Appendix B: Financial Statements for KBR (MSN Moneycentral)