Engineering and construction giant KBR has agreed to pay $2.5 million to settle charges that it overstated a key non-financial statement performance metric known as work in backlog.
The U.S. Securities and Exchange Commission said KBR misled investors by including $459 million in its publicly disclosed backlog for a pipe fabrication and modular assembly contract in Canada, even though it had not actually received — and the customer, a Canadian energy company, was not obligated to provide — any orders under the contract.
The Canadian contract was KBR’s fifth largest by funded backlog amount at year-end 2013. The overstatement allegedly began during the second quarter of 2012 and continued for almost two years, resulting in inaccurate disclosures in KBR quarterly and annual financial reports.
The SEC said in an administrative order that the company would pay a $2.5 million civil penalty.
“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” Shamoil T. Shipchandler, director of the SEC’s Fort Worth Regional Office, said in a news release. “To the extent that companies disclose these kinds of metrics, companies must ensure they are accurate and not misleading.”
According to the commission, KBR’s public disclosures of its work in backlog were important to investors because the metric was supposed to represent the amount of revenue that it expected to receive in the future from “firm orders” under previously awarded contracts.
Under the Canadian contract, which had a five-year term, KBR Canada was required to reserve enough capacity to produce 20 modules a month. Despite having no commitment for any firm orders, the firm allegedly assigned a $459 million backlog value to the contract, estimating it would generate $400,000 per module built and multiplying the monthly capacity by the number of months under the term of the contract, excluding a sixth-month “ramp-up” period.
By year-end 2013, which was about 20 months into the contract, the customer had only awarded KBR less than approximately $55 million in work authorizations and a total of 117 modules, the SEC said.