Research Paper on "KBR In-Depth Report International Finance"

Research Paper 10 pages (3306 words) Sources: 8

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KBR

Company Profile

KBR (Kellogg, Brown and Root) has its origins in a 1901 pipe fabrication business. By 1927 the company was becoming engaged in the petrochemical processing industry, in which it remains active today. The company also had a shipbuilding business, which contributed to its activities in offshore oil drilling. The company was purchased by Dresser, which was then purchased by Halliburton. In 2007, KBR was spun off from Halliburton and continues today as an independent entity. KBR employs over 40,000 people. The company is engaged in engineering, construction and services, focused largely on the oil industry and defense. The company has also recently become engaged in the power, chemicals, petrochemicals and health care industries (KBR.com, 2011, History).

KBR has ten business units: Downstream, Gas Monetization, Infrastructure and Minerals, International Government and Defense, North American Government and Defense, Oil & Gas, Power & Industrial, Technology and Ventures. The company is heavily involved in oil and gas in particular and claims to have built "over half of the world's liquefied natural gas production capacity over the past 35 years, and the first offshore platform beyond the sight of land" (KBR.com, Company Profile). The company's mission statement is "To safely deliver any project, any time, in any environment for the benefit of our customers, shareholders, employees and communities we serve" (KBR.com, Mission, Vision and Values).

In terms of size, KBR recorded revenue of $12.06 billion in 2009, up from $11.493 billion in 2008. Net income for 2009 was $290 million, down from $319 million in 200

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8 (MSN Moneycentral, Financial Results). The company's stock currently trades at $35.06, just below the 52-week high. The company pays a dividend of $0.20 per year, for a dividend yield of just 0.57%. The earnings per share in 2009 were $2.02. The beta is 1.12 (MSN Moneycentral, Quote).

The income statement shows a sharp increase in the company's revenues in 2008, attributable to its purchase that year of privately-held BE&K. This deal added 9000 employees to the company. BE&K is focused on the engineering, construction and maintenance industries (Cooper, 2008). This acquisition helped the company to a 40% increase in profit in Q2 of 2009. KBR has also benefited from multiple government contracts. It provides non-military services such as food, laundry, fuel and lodging to U.S. military operations in Afghanistan, Iraq and Kuwait. In its other business, KBR is active in natural gas in Nigeria and Australia, has an offshore project in the Caspian Sea and has UK military contracts similar to its American ones (Clanton, 2009).

International Arena

One of KBR's first international operations was the construction of Europe's first crude oil-based liquid ethylene cracking facility in 1956 (KBR.com, History). The company became active in the North Sea in 1965 (Ibid) and has been in the international arena ever since. The company today operates in a number of international markets. In addition to U.S. And UK military work in the Middle East and Central Asia, the firm is involved around the world in oil and natural gas. This includes the aforementioned Nigeria, Australia and Caspian operations, along with Saudi Arabia (KBR.com, Petrochemicals), Egypt (KBR.com, Syngas & Fertilizers), Qatar and Bahrain (KBR.com, Transportation), Ireland (KBR.com, Investment and Asset Management) and others.

At this point, KBR has operated nearly 60 years in Africa, maintaining the regional headquarters in Johannesburg (KBR.com, Africa). It has offices in both Mexico and Canada, and is involved in the oil industries in both countries (KBR.com, Americas). It has offices in Indonesia, Singapore, India and China and has its biggest project there in Indonesia's Papua province (KBR.com, Asia). European offices are in Moscow, Goteborg and the UK and the company remains heavily involved in the North Sea, the UK Department of Defense and the Caspian (KBR.com, Europe).

International Issues & Challenges

There are few corporate records for KBR's international activities dating to the 1950s and 60s when the company first went international. At the time, the greatest challenges in its work most likely related to the technical challenges presented by the tasks -- such as building the first liquid natural gas extraction sites and the early offshore oil platforms. The company has long had close connections with the U.S. And UK governments, which at the time were seeking to control much of the global oil trade, and much of its early work overseas was conducted with the support of these governments.

In more recent years, the company has faced difficulties with respect to its offshore financial operations. The company has made use of shell companies registered in the Cayman Islands to employee nearly one-third of its workforce. This helped the company skirt U.S. taxes, Social Security and Medicare contributions. This led to a scandal in 2008 and questions regarding the firm's ethical standards (Stockman, 2008). Taxation has become the biggest international financial issue for the company.

Operating in volatile regions would imply that security should be an issue for KBR. In particular, the company's operations face significant political risk, in addition to risks associated with terrorism and crime in the Middle East and Africa particularly. KBR largely offsets these risks two ways. The first is that KBR is a major security provider, so is able to protect its own interests from terrorism and crime (Halliburton.com, 2005, Defense). In addition, the company's close ties to the U.S. government in particular have allowed it to operate in war-torn countries with the safety and protection of the U.S. military. Security of foreign workers, however, remains an issue for the company. At least 110 of KBR's employees have been killed in Iraq since 2003 (Lozano, 2008). The company's track record of safety in other volatile regions and with subcontractors does not appear to differ from is track record in Iraq.

The company also has faced issues with internal discipline. Highlights of its track record in managing employee conduct include the electrocution of soldiers in Iraq (Risen, 2008), a situation that led to significant conflict with the U.S. Army; and a gang-rape case where KBR covered up evidence (McGreal, 2009); accusations of human trafficking among KBR employees (AFP, 2008). These challenges relate to the difficulties that a firm has in ensuring an appropriate corporate culture in relatively lawless places. That KBR has struggled so widely on fundamental ethics in its overseas operations is an indicator that operating in extreme conditions remains a challenge for the company.

Volatility, Exchange Rates, Hedging Activities and Property Rights

The company has a large number of fixed price contracts, which increases the firm's exchange rate risk. Approximately 18% of the firm's contracts are fixed-price, versus 82% cost-reimbursable (2009 Annual Report, 25). The latter are less risky, since costs associated with exchange rate fluctuations are passed onto the customer. However, with fixed-price contracts, KBR is subject to foreign exchange risk to the extent that there is a difference in the currency of the transactions involved in bringing that contract to fruition. Revenues from these contracts are subject to translation risk even if the transaction risk is hedged. In addition, the company has approximately $14 billion in revenues in its backlog. To the extent that these represent fixed-rate contracts or foreign currency contracts or costs, KBR is subject to significant exchange rate risk should exchange rates fluctuate significantly between the time of contract signing and the time of performance (2009 Annual Report, 27).

The most significant hedge for KBR is the use of U.S. dollars in its contracts. The company prefers to use U.S. dollars as a means of mitigating exchange rate risk. In addition, it pays most of its employees in U.S. dollars and deals in dollars with most of its suppliers. That said, there remains "a sizeable portion of our consolidated revenue and consolidated operating expenses…in foreign currencies." This raises two specific forms of risk -- transaction and translation from exchange rate fluctuations and the risks associated with moving money between jurisdictions for re-investment. The company specifically notes that there are "limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries" (2009 Annual Report, 32).

The company is compelled leave some of its foreign exchange exposure unhedged, because some of this exposure derives from operations in nations that do not have hard currencies. Often, local governments in these nations insist that the contracts are denominated in local currency, which limits the hedging options for KBR, as soft currencies are relatively illiquid and do not have active derivatives markets (Ibid). Where possible, KBR does use derivatives to hedge foreign currency exposure, but this is typically with respect to major currencies for its Canadian, British and Australian businesses. Middle Eastern and African business often results in exchange rate risk that is much more difficult to hedge (Ibid).

KBR also faces risks with respect to property rights. The company makes extensive use of intellectual property, but by the nature of its operations often uses this technology in nations that do not have Western-quality intellectual property rights laws. There are also risks associated with… READ MORE

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Quoted Instructions for "KBR In-Depth Report International Finance" Assignment:

“

Here is the assignment. The company will be KBR (www.kbr.com)

______

***** This paper is essentially an in-depth report (in APA manuscript format) on the MNC you chose to track at the beginning of this course. In around 3,000 words (of text body, not including Title page, References page, and any addenda used for graphs, tabular data and other) you should address:

1. Company Background (brief history) including their major products

2. Descriptions of when and how the company entered the international arena and their markets

3. Initial international issues and challenges

4. Current international issues and challenges

5. Volatility, exchange rates and hedging activities, and property rights

6. Corporate Social Responsibility efforts

7. Outlook

Additionally, you should include as addenda at least:

1. Financial Statement and Ratio an*****s (3-year)

2. Three-year stock history (graph recommended) *****

____

I asked for some clarification regarding the addendum, here it is:

Dear Professor *****¦,

I have a concern about our research assignment addendum (a).

I am planning on including in my *****"Outlook*****" section a brief analysis of

KBR stock history, financial statements and ratios (p/e, debt-to-equity, assets/liabilities) over that last three years.

So the addendum would only include a stock graph and any relevant income statements and balance sheets would be too large to include in the body of the assignment.

I am on the right track with regard to the addendum?

___

The Professor answered: Good plan, you are on the right track.

___

Please cite at least 8 credible online sources/references such as Forbes.com, Harvard Business Review, nytimes.com*****¦Do not use wikipedia.com, info.com, ask.com, etc*****¦ The sources must not require a password to be accessed.

For in-text citations/references indicate author, date, and page number as per APA standards- example (Shapiro, 2010, p 423) If no page number is available then please give the paragraph number. This is very important.

Please use at least 3 quotations of not more than 3 sentences each. Total quotations should not be more than 10% of the paper.

For Section 7, the Outlook, please include an analysis of KBR*****s stock history, financial statements and ratios (p/e, debt-to-equity, assets/liabilities) over that last three years. Therefore, the outlook should probably be the longest section (but not more than three [3] pages.)

The addendum must include a three year stock graph, and a copy of what ever financial statements, balance sheets, cash flow etc*****¦ that you reference regarding the Outlook. If you cut and paste them from finance.yahoo.com or whatever financial website you use, that is fine.

Please write this as if it were for a Masters level International Finance class. Therefore I am requesting a statistic analysis to ensure that a solid financial analysis of KBR is included (financial statement, ratios, stock [3 year] and all of the sections of the assignment above are adequately addressed.

If you want to label each section of the paper (I. Company History, II. International Arena/Markets, III. Initial International issues and challenges, etc*****¦) that may be helpful.

Please include a reference/works cited page, a title page in APA format.

Thank for you excellent writing. I am requesting ***** ***** if available.

*****

*****

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