KBR, Inc. Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2022, compared with the corresponding 2021 periods. The request metadata identifies “2021 Q3,” but the supplied filing is KBR’s third-quarter 2022 Form 10-Q, filed October 27, 2022.
Business Context
KBR provides government solutions and sustainable technology solutions globally. Its reportable segments are Government Solutions (GS), Sustainable Technology Solutions (STS), and Other corporate activities. GS serves defense, intelligence, space, aviation and other government programs, while STS provides energy-transition technologies, engineering, advisory and digital solutions.
Key developments included the August 2022 acquisition of VIMA Group, continued integration of Frazer-Nash, the planned exit from commercial projects in Russia, and additional investment in Mura Technology.
Financial Performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $1,626 million | $1,843 million | Down 12% |
| Gross profit | $225 million | $193 million | Up 17% |
| Operating income | $125 million | $101 million | Up 24% |
| Net income attributable to KBR | $74 million | $57 million | Up 30% |
| Diluted EPS | $0.49 | $0.38 | Up $0.11 |
| Cash dividends declared per share | $0.12 | $0.11 | Up $0.01 |
Q3 gross margin increased to approximately 13.8% from 10.5%, operating margin increased to approximately 7.7% from 5.5%, and net margin attributable to KBR increased to approximately 4.6% from 3.1%.
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Revenue | $4,956 million | $4,840 million | Up 2% |
| Gross profit | $622 million | $568 million | Up 10% |
| Operating income | $221 million | $102 million | Up 117% |
| Net income attributable to KBR | $97 million | $(43) million | Improved by $140 million |
| Diluted EPS | $0.65 | $(0.30) | Improved by $0.95 |
Nine-month gross margin was approximately 12.6% versus 11.7% in the prior period; operating margin was approximately 4.5% versus 2.1%; and net margin attributable to KBR was approximately 2.0% versus negative 0.9%.
Segment Results and Material Changes
- Government Solutions: Q3 revenue declined 17% to $1,293 million, primarily because approximately $382 million of contingency work under the Operation Allies Welcome program had been completed. Q3 operating income declined 8% to $105 million. For the nine months, revenue increased 3% to $4,064 million and operating income increased 27% to $351 million, supported by organic growth, Frazer-Nash and lower amortization.
- Sustainable Technology Solutions: Q3 revenue increased 16% to $333 million and operating income increased 143% to $56 million. Nine-month revenue was essentially flat at $892 million, while the operating loss improved to $18 million from $71 million.
- Joint ventures: KBR recorded a $137 million non-cash equity-method charge in Q1 2022 related to the Ichthys LNG subcontractor settlement, compared with $203 million of Ichthys-related charges in the first nine months of 2021. KBR received approximately $190 million from the first subcontractor settlement payment and expects a second payment of AUD 90 million in March 2023.
- Russia exit: The company recognized $22 million of unfavorable gross-profit impact and $6 million of severance and asset-impairment costs during the first nine months of 2022. STS revenue and operating results also reflected reduced Russian activity.
- Other items: Nine-month results included a $22 million gain on asset and investment dispositions and a $16 million unrealized gain on the Mura cost-method investment.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $336 million for the first nine months of 2022, compared with $276 million in 2021.
- Investing activities provided $86 million, primarily reflecting the approximately $190 million JKC distribution and proceeds from investment sales, partly offset by the $73 million VIMA acquisition, $61 million of Mura investment and $39 million of capital expenditures.
- Financing activities used $290 million, including $124 million of share repurchases, $49 million of dividends and $109 million of debt repayments.
- Cash and cash equivalents were $461 million at September 30, 2022, compared with $370 million at December 31, 2021. Approximately $90 million was held by consolidated joint ventures and Aspire Defence entities and was not readily available for general corporate needs.
- Total debt was $1,737 million, including $1,722 million of long-term debt. Debt declined from $1,891 million at December 31, 2021.
- The company had a $1 billion revolving credit commitment and $450 million of bilateral and uncommitted lines supporting letters of credit. Total remaining capacity was approximately $933 million.
- KBR was in compliance with its debt covenants. Management stated that cash, operating cash flow, credit availability and other lines of credit were sufficient for the next 12 months.
- Accounts receivable sales derecognized $2.236 billion of receivables during the first nine months, with $101 million outstanding to financial institutions at September 30, 2022.
Backlog, Outlook and Guidance
- Total backlog was $15.334 billion at September 30, 2022, up from $14.973 billion at year-end 2021. GS backlog was $11.323 billion and STS backlog was $4.011 billion.
- Remaining performance obligations were $11.0 billion; management expected approximately 36% to be recognized within one year, 37% in years two through five and 27% thereafter.
- Approximately 37% of backlog was expected to be executed within one year. About $8.1 billion of GS backlog was funded, and approximately $4.4 billion of priced U.S. government options had not yet been exercised.
- Management cited continued opportunities from defense modernization, space, cybersecurity, energy transition, decarbonization, circular economy solutions and hydrogen or green ammonia.
- The filing does not provide a clear quantitative earnings or revenue guidance range for full-year 2022. It states that the estimated annual effective tax rate was approximately 25%, excluding discrete items.
Risks, Contingencies and Unusual Items
- Russia-related sanctions, supply-chain disruption, inflation, labor and material costs, foreign-exchange volatility and fixed-price contract exposure may adversely affect results.
- The HomeSafe Alliance award, with a contract ceiling of $20 billion and a potential nine-year term, remained subject to protests and the transition was on hold.
- KBR has significant project guarantees, letters of credit and joint-venture obligations; the maximum future exposure under certain performance guarantees cannot be estimated.
- The North West Rail Link joint venture faces claims of up to approximately AUD 301 million; KBR accrued an immaterial probable and estimable loss and expects project-specific insurance coverage, subject to deductibles.
- Government audits, LogCAP III closeout matters, False Claims Act proceedings and other litigation remain ongoing. KBR had accrued $68 million for probable and estimable unallowable government-contract costs.
- The $350 million convertible notes mature in November 2023. The filing states that the if-converted value exceeded principal by approximately $248 million at September 30, 2022, with potential dilution substantially offset by the note hedge but subject to warrant exposure.
- U.K. pension funding requirements are approximately £33 million annually through March 2028. KBR made an advance payment of approximately £29 million toward 2023 requirements after quarter-end.
- KBR adopted ASU 2020-06 using full retrospective presentation, affecting convertible-debt accounting, debt balances and diluted share calculations but not materially affecting operating performance or cash flow.
Investor Verification Items
- Confirm that the applicable filing period is Q3 2022 rather than Q3 2021.
- Assess how much of the earnings improvement reflects recurring operating performance versus settlements, investment gains, reduced Ichthys charges and other unusual items.
- Monitor collections, receivable-sale activity and the sustainability of operating cash flow after completion of OAW-related work.
- Track refinancing or repayment plans for the $350 million convertible notes due November 2023 and the effect of variable interest rates.
- Follow the remaining JKC subcontractor settlement payment, Ichthys contingent liabilities and other joint-venture funding obligations.
- Evaluate the effect of the Russia exit, sanctions, inflation and fixed-price contract cost pressures on STS margins and backlog conversion.
- Verify backlog quality, including funding status, customer options, fixed-price exposure and the portion attributable to unconsolidated joint ventures.
- Review pending government-contract matters, litigation reserves and potential exposure beyond amounts accrued.