KBR adjusts to life outside the warzone

Company takes on more State Department work as military operations close in Iraq and Afghanistan.

After a decade of war, KBR Inc. is now helping guide the Army step down its operations by managing the logistics of withdrawals. However, reducing troops and operations in war zones continues to reduce KBR’s revenue. Now company executives are looking for new areas of business.

The Houston-based company's government business has been declining. U.S. military officials have reduced their forces in Iraq, and KBR is completing work in Afghanistan. Operations in its North American Government and Logistics division, formerly known as North American Government and Defense, decreased by $1.1 billion in 2011, compared to 2010. Much of that decrease involved one contract, the Logistics Civil Augmentation Program (LogCAP) III contract, use of which declined to $1.5 billion in 2011, from $2.8 billion in revenue in 2010.

But despite the declines the company still ranks No. 16 with $2.2 billion in prime contracts in fiscal 2011.

KBR has demobilized in the Iraqi theater of operations and the scope of KBR operations under the LogCAP III contract effectively ended in December.

“Although we have seen some U.S. troop deployments shift within the Middle East region to Afghanistan and other areas under LogCAP IV, we expect the volume of services we provide to the U.S. government in the Middle East to continue to decline over the next few years,” KBR wrote in its 2011 annual report.

Still, KBR has hope. One of its key awards in 2011 was the sustainment task order under the LogCAP IV contract. The task order encompasses support services for the U.S. embassy staff in Baghdad and other diplomatic posts throughout Iraq, as the Defense Department largely moves on.

“Our North American Government and Logistics Business Unit made a successful transition in Iraq from supporting U.S. troops to supporting the U.S. Department of State,” William Utt, KBR’s chairman, president and CEO, wrote in the report.

The company sees more LogCAP work ahead. It already offset some decreases with an increase of roughly $188 million associated with its LogCAP IV task order that began in the middle of 2010.

With past successes and the ability to provide local services through its Iraqi First program, “KBR occupies an outstanding position from which to compete for a volume of LogCAP IV work that is shaping up to be larger than initially anticipated,” according to the report.

KBR is also bringing in revenue from its continued work with the U.S. Army in Europe. It has a contract worth up to $245 million over five years, which includes base operations and support services in a region encompassing 51 countries. The contract extends KBR’s work in the Balkans that dates back to 1995.

As another major 2011 award, KBR was a winner of a multiple-award contract from the U.S. Central Command (CENTCOM). It opens the door for KBR to compete for $3.8 billion worth of work over the next five years. The current program includes design-and-build and construction projects that support the U.S. military and other government operations throughout 20 Middle Eastern countries.

As a case for past performance, KBR has carried out $620 million of work across 32 task orders under the previous CENTCOM MATOC program.

In the company report, Utt put a positive spin on the past year as he looked ahead. Excluding expected declines associated with the LogCAP work, revenue grew 4 percent. KBR’s backlog continued to strengthen, growing 4 percent during the year despite a 9 percent reduction in revenue backlog. It reflects a reduction in lower-margin legacy projects.

The approach ahead is one of calculated steps.

“We will proceed thoughtfully, reflecting our core values and our best-in-class risk awareness and management, which have driven consistent financial performance over the last five years,” Utt wrote.