KBR, Inc. FY2021 Form 10-K Summary
Reporting period: The supplied filing is KBR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed February 22, 2022. The request metadata identifies “2020 Q4,” which does not match the filing period.
Business Context
KBR provides science, technology, engineering, defense, intelligence, space, aviation, operational support, information operations and sustainable technology solutions to government and commercial customers globally. Effective January 1, 2021, KBR reorganized into two core segments: Government Solutions (GS) and Sustainable Technology Solutions (STS), plus non-core corporate activities.
- GS represented approximately 84% of 2021 revenue and serves primarily U.S., U.K. and Australian government customers.
- STS includes proprietary process technologies, energy-transition advisory services, engineering and digital industrial solutions.
- The U.S. government accounted for $5.1 billion, or 70%, of consolidated revenue in 2021.
- KBR acquired Frazer-Nash for approximately $392 million in cash on October 20, 2021, and acquired Harmonic assets for approximately $19 million.
Financial Performance and Liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $7.339 billion | $5.767 billion | +27% |
| Gross profit | $806 million | $666 million | +21% |
| Gross margin | 11.0% | 11.5% | Down approximately 50 bps |
| Operating income | $231 million | $57 million | +305% |
| Operating margin | 3.1% | 1.0% | Improved |
| Net income attributable to KBR | $18 million | $(72) million | Returned to profit |
| Diluted EPS | $0.12 | $(0.51) | Improved |
| Operating cash flow | $278 million | $367 million | Down $89 million |
| Capital expenditures | $30 million | $20 million | Up $10 million |
| Cash and equivalents | $370 million | $436 million | Down $66 million |
GS revenue increased 52% to $6.149 billion, including $1.6 billion from the non-recurring Operation Allies Welcome program. STS revenue declined 30% to $1.190 billion following KBR’s exit from commoditized construction services, but STS gross profit increased 34% to $231 million.
Equity in earnings of unconsolidated affiliates declined to a $170 million loss from $30 million of earnings, primarily because of a $193 million non-cash charge and an additional $10 million charge related to the Ichthys LNG project settlement. Excluding this item, reported operating performance improved substantially compared with 2020, which included $99 million of goodwill impairment and $214 million of restructuring and asset impairment charges.
Total debt was approximately $1.868 billion at December 31, 2021, including $1.852 billion of long-term debt. The company reported approximately $1.9 billion of indebtedness, remained in compliance with its debt covenants and stated that available cash, operating cash flow and credit capacity were sufficient for the next 12 months. The Senior Credit Facility includes a $1 billion revolver, with maturities extended to November 2026 for the revolver and Term Loan A; Term Loan B matures in February 2027.
- Outstanding borrowings under the Senior Credit Facility: $364 million.
- Letters of credit outstanding: $48 million under the Senior Credit Facility and $229 million under uncommitted lines.
- Remaining committed and uncommitted letter-of-credit capacity: approximately $880 million.
- Defined benefit pension funding deficit: approximately $88 million; 2021 pension contributions were $46 million.
- Contractual obligations disclosed: approximately $2.717 billion, including debt, interest, leases, pension funding, purchase obligations and deferred taxes.
Material Changes Versus the Prior Comparable Period
- Revenue and gross profit grew materially, driven by GS organic growth, Operation Allies Welcome and the Centauri and Frazer-Nash acquisitions.
- Operating income increased sharply as 2020 goodwill, restructuring and asset impairment charges did not recur.
- Net income attributable to KBR improved from a $72 million loss to $18 million of income.
- Cash flow from operations decreased, principally because increased accounts receivable associated with Operation Allies Welcome absorbed $476 million of cash, partly offset by a $447 million favorable accounts-payable impact.
- STS revenue contracted after the exit from higher-risk commoditized construction services, while segment gross profit improved.
- Backlog was broadly stable at $14.973 billion at year-end 2021 versus $15.115 billion at year-end 2020. Approximately 30% was expected to convert within 2022.
- Bookings totaled approximately $6.7 billion in GS and $1.1 billion in STS.
- Cash distributions and capital allocation continued, including $61 million of dividends and $82 million of share repurchases in 2021. The company had $225 million remaining under its repurchase authorization and declared a $0.12-per-share dividend for April 2022.
Guidance, Outlook, Risks and Unusual Items
Management expects continued opportunities from defense modernization, space, cybersecurity, health and human performance, energy transition, hydrogen, green ammonia, carbon reduction and circular-economy technologies. The filing does not provide a clear quantitative full-year 2022 revenue or earnings guidance figure.
- HomeSafe contract: A KBR-led joint venture received a U.S. Transportation Command household-goods contract with a $20 billion ceiling and potential nine-year term. The award was under protest, and its timing and ultimate contribution remain uncertain.
- Operation Allies Welcome: The $1.6 billion of 2021 revenue was described as non-recurring and expected to be substantially completed in early 2022.
- Ichthys LNG: The client settlement resolved major claims and disputes, but KBR remains exposed through its 30% JKC interest to ongoing claims against the former power-plant subcontractor. JKC’s claims were approximately $1.6 billion, with arbitration expected in April and May 2022. An unfavorable outcome or inability to collect could materially affect earnings, liquidity and financial position.
- Contract estimates: KBR recognizes substantial revenue using the cost-to-cost method. At December 31, 2021, $426 million of unapproved change orders and claims and estimated supplier recoveries remained included in project estimates at completion, down from $1.048 billion in 2020.
- Government concentration: Government contract audits, cost disallowances, False Claims Act matters, contract protests, funding delays and termination rights could affect revenue and cash flow. KBR had accrued $76 million for potentially unallowable government-contract costs.
- COVID-19 and labor conditions: Pandemic variants, supply-chain disruptions, vaccination requirements, labor shortages, inflation and worksite restrictions could affect project execution and costs.
- Leverage and interest rates: Debt covenants, variable-rate borrowings, LIBOR transition and refinancing requirements could constrain financial flexibility or increase funding costs.
- Tax assets: KBR maintained a $204 million valuation allowance against deferred tax assets and indicated that a possible $15 million to $25 million release could occur within 12 months if sufficient positive evidence develops, potentially depending on the HomeSafe booking.
- Goodwill and intangibles: Goodwill was $2.060 billion and intangible assets were $708 million at year-end. No 2021 goodwill impairment was recorded, but impairment remains sensitive to business performance, market conditions and valuation assumptions.
Important Facts for Investors to Verify
- Confirm that the applicable period is FY2021 rather than 2020 Q4.
- Assess the sustainability of results after removing the non-recurring Operation Allies Welcome contribution.
- Review the Ichthys LNG arbitration, the $1.6 billion claim and potential KBR exposure through JKC.
- Evaluate the status and financial impact of the protested $20 billion HomeSafe award.
- Reconcile reported debt, cash, revolver availability, letters of credit and covenant headroom.
- Review cash conversion, including the impact of accounts receivable, receivable sales and project working capital.
- Test the assumptions supporting cost-to-cost revenue recognition, unapproved claims and supplier recoveries.
- Monitor U.S. government audits, False Claims Act proceedings, LogCAP III closeout and other contingent liabilities.
- Assess pension funding requirements, tax valuation allowances and the potential effect of rising interest rates.
- Note that KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, while excluding the newly acquired Frazer-Nash and Harmonic businesses from management’s 2021 internal-control assessment.