ITEM 2.04 Triggering Events That Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement.
On December 2, 2011, KBR, Inc. ("KBR") entered into a $1 billion, five-year
unsecured revolving credit agreement with a syndicate of international banks.
Pursuant to the terms of that credit agreement, it is an event of default if any
certificate furnished to the bank syndicate is incorrect or proves to have been
incorrect, when made or deemed made. As described in Item 4.02 below, it has
been determined that KBR's previously issued consolidated financial statements
as of and for the year ended December 31, 2013 should no longer be relied upon.
We do not currently expect that the corrections to our 2013 consolidated
financial results, and any impact to our March 31, 2014 results, will cause a
financial covenant breach under our credit agreement; however, the management
certifications we made to our financial institutions under the credit agreement
are no longer valid. Without further agreement from our bank syndicate, KBR is
prohibited from requesting the issuance of any new letters of credit or loan
advances under its committed and uncommitted lines of credit, which could
materially impact its business operations and liquidity. Under certain
circumstances, KBR may also be required to provide cash collateral to secure
outstanding letters of credit or surety bond positions. As of April 30, 2014,
KBR estimates that it had outstanding letters of credit of approximately $632
million as well as consolidated cash and equivalents of approximately $900
million. We are currently in discussions with our bank syndicate to reach an
amicable resolution of this matter.
ITEM 4.02 Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
In connection with the preparation of KBR, Inc.'s Form 10-Q for the three months
ending March 31, 2014, we determined that the estimated costs to complete seven
Canadian pipe fabrication and module assembly contracts within our Services
business segment that were awarded during 2012-2013 will result in pre-tax
charges of $158 million, consisting of the reversal of $23 million in previously
recognized pre-tax profits and the recognition of approximately $135 million in
pre-tax estimated losses at completion. Our review of this matter is ongoing and
therefore the amounts previously noted are subject to change. We believe,
subject to further review, that the majority of these losses should have been
recognized in our consolidated financial statements as of and for the year ended
December 31, 2013.
The seven contracts in question are with third-party clients and do not impact
other KBR projects. Six of the contracts will be completed during 2014 or in
early 2015. The seventh contract is a master services type agreement that
provides our client with the right, but not the obligation, to place new pipe
fabrication and module assembly orders until 2017. The pre-tax losses noted
above include estimated losses only for work released to us through March 31,
2014. Future work orders, if any, will be accounted for at the time of each
release. We have begun discussions with our client under the master services
agreement regarding a market-based cost adjustment. At this time, we can provide
no assurance that such discussions will be successfully concluded. The negative
cash impact associated with the work released to date under the seven contracts
has largely been incurred and the forecast net negative cash flow to complete
this work is expected to be less than $45 million. The estimated losses noted
above do not assume recovery from clients for quantity and/or cost increases
caused by client-directed actions. We believe we are entitled to certain
recoveries from our clients but since collection remains uncertain, we will
record any such recoveries if, and when, mutually agreed.
KBR's self-perform pipe fabrication and module assembly activities are limited
to our Edmonton, Alberta operations. The contracts referenced herein were part
of a rapid expansion of work at these operations and resulted in increased
internal and external costs and adversely impacted our historical module
assembly productivity rates.
Separately, during the preparation of our Form 10-Q for the three months ending
March 31, 2014, we identified an overstatement error in our revenue recognition
on a long-term construction project approximating $9.0 million pre-tax ($6.3
million after tax) and an error which resulted in an understatement of our
income tax provision of approximately $6.5 million that had not been properly
included in the Consolidated Statement of Income for the year ended December 31,
As a result of the errors described above, on May 1, 2014, the Audit Committee
of the Board of Directors of KBR, in consultation with and based on the
recommendation of management, concluded that KBR's consolidated financial
statements as of and for the year ended December 31, 2013 should be restated to
correct for the aforementioned errors and that, accordingly, KBR's previously
issued consolidated financial statements for 2013 should no longer be relied
upon. Additionally, KBR's earnings and press releases and similar communications
should no longer be relied upon to the extent that they relate to these
consolidated financial statements. As soon as practicable, we expect to amend
KBR's Form 10-K for the year ended December 31, 2013 to restate the financial
statements and correct the errors identified herein, and to revise related
information, including our discussion of KBR's internal controls and procedures.
As a result, we will not file KBR's 10-Q for the three months ending March 31,
2014 until after filing of the amended Form 10-K. Given the ongoing nature of
our review, the forecast filing date for the amended 2013 Form 10-K and Form
10-Q for the three months ending March 31, 2014 is uncertain. KBR's management
is continuing to review these matters to ensure it has determined the causes for
these errors and will continue to consider the effect of these errors on our
prior conclusions regarding our internal control over financial reporting and
disclosure controls and procedures as of the end of the applicable period. We
will amend, as necessary, any disclosures pertaining to our evaluation of such
controls and procedures in connection with our amended Annual Report on Form
10-K for the year ended December 31, 2013, and in our Form 10-Q for the three
months ending March 31, 2014.
As described in Item 2.04 above, we are working closely with our bank syndicate
to timely address any and all compliance matters related to our credit agreement
and other financial arrangements.
The KBR Audit Committee, comprised of members of its Board of Directors, has
retained independent legal and accounting advisors to review these matters and
to advise the Committee, which is in addition to the review being conducted by
KBR's management. The Audit Committee has discussed the matters described in
this Current Report with KPMG LLP, KBR's independent registered public
As a result of the above items, KBR is also withdrawing its previously issued
guidance for 2014. We expect to provide updated guidance later this year. In
keeping with our previously announced intent to return capital to shareholders,
between February 27, 2014 and April 30, 2014, KBR repurchased approximately 3.4
million shares of its common stock at an average price of $27.29 for a total of
ITEM 9.01 Financial Statements and Exhibits.
99.1 KBR, Inc. press release dated May 5, 2014 entitled, "KBR, Inc. Announces
Intention to Restate Consolidated Financial Statements for the Year 2013"