KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2021. The request metadata identifies “2020 Q1,” but the filing is for the first quarter of 2021 and compares results with the first quarter of 2020.
Business Context
KBR provides government services, defense and intelligence solutions, science and space services, readiness and sustainment, international government services, sustainable technology, energy-transition advisory services, proprietary process technologies, and digital operations and maintenance solutions.
Effective January 1, 2021, KBR reorganized its reporting structure into Government Solutions, Sustainable Technology Solutions and Other. The company acquired Centauri on October 1, 2020, expanding its space, intelligence, cyber and emerging-technology capabilities.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1.461 billion | $1.537 billion | Down 5% |
| Gross profit | $168 million | $186 million | Down 10% |
| Gross margin | 11.5% | 12.1% | Down approximately 60 bps |
| Operating income (loss) | $89 million | $(69) million | Improved $158 million |
| Operating margin | 6.1% | (4.5)% | Improved |
| Net income (loss) attributable to KBR | $47 million | $(104) million | Improved $151 million |
| Diluted EPS | $0.33 | $(0.73) | Improved |
| Operating cash flow | $50 million | $41 million | Up $9 million |
| Cash and equivalents | $445 million | $436 million at Dec. 31, 2020 | Up $9 million |
Interest expense was $22 million versus $23 million in the prior-year quarter. The effective tax rate was approximately 25%, compared with 1% in Q1 2020. Comprehensive income attributable to KBR was $76 million, compared with a comprehensive loss of $198 million in Q1 2020.
At March 31, 2021, total debt was $1.598 billion, including $1.586 billion of long-term debt net of current maturities. Cash included $151 million held by consolidated joint ventures and Aspire Defence entities that was restricted to project activities. KBR had approximately $842 million of remaining capacity under committed and uncommitted lines supporting letters of credit, and was in compliance with its debt covenants.
Segment Performance and Changes Versus Prior Period
- Government Solutions: Revenue increased 19% to $1.164 billion, primarily from $132 million of Centauri revenue, higher Readiness & Sustainment and Defense & Intel activity, and increased Australian government work. Gross profit declined 10% to $116 million, mainly because of lower Aspire program volume.
- Sustainable Technology Solutions: Revenue declined 46% to $297 million and gross profit declined 9% to $52 million, reflecting completion or near-completion of lower-margin projects and the exit from selected non-strategic activities.
- Equity earnings: Increased to $12 million from $1 million, reflecting improved joint-venture performance and a favorable, non-recurring resolution of a matter in STS.
- One-time items: Q1 2020 included $62 million of goodwill impairment, $116 million of restructuring and asset-impairment charges, and a $19 million gain on asset dispositions. No goodwill impairment or restructuring and asset-impairment charges were recorded in Q1 2021.
- Backlog: Declined to $14.637 billion from $15.115 billion at December 31, 2020. Remaining performance obligations were $11.6 billion, with approximately 30% expected to be recognized within one year.
Cash Flow, Liquidity and Outlook
Cash increased by $9 million during the quarter. Investing cash outflows were $22 million, primarily for a technology license, a plastics-recycling technology investment and funding KBR’s share of Ichthys-related costs. Financing cash outflows were $22 million, including $14 million of dividends and debt repayments.
KBR stated that cash balances, operating cash flow, Senior Credit Facility availability and other credit lines should be sufficient to support operations for the next 12 months. The company sold $602 million of receivables during the quarter under monetization programs; $117 million remained outstanding with financial institutions at March 31, 2021.
Management expects continued government opportunities in defense modernization, space, cybersecurity and emerging technologies. Commercial demand is expected to benefit from energy transition, decarbonization, carbon capture, biofuels, circular economy solutions, hydrogen and green ammonia. The filing does not provide consolidated revenue or earnings guidance for fiscal 2021. It does provide an estimated 2021 annual effective tax rate of approximately 25%, excluding discrete items.
Risks, Contingencies and Unusual Items
- Ichthys LNG project: KBR’s 30%-owned JKC joint venture had $1.033 billion of unapproved change orders and claims included in project estimates at March 31, 2021, including KBR’s $158 million proportionate share related to the Funding Deed. The client demanded repayment of the Funding Deed amount and threatened legal action; arbitration remains unresolved.
- JKC was pursuing approximately $1.8 billion of claims against the Consortium that abandoned the power-plant subcontract. If recovery is unsuccessful or counterparties cannot satisfy an award, KBR could bear its pro rata share of unrecovered costs. KBR had contributed approximately $484 million to JKC on an inception-to-date basis and had $164 million of related letters of credit outstanding.
- Pension obligations: KBR reported a $363 million pension funding deficit and expects approximately $49 million of plan contributions during 2021, including $11 million paid in the first quarter.
- Government matters: Legacy LogCAP III disputes, audits, FCA litigation and related claims remain outstanding. KBR accrued its best estimate of probable loss for the DOJ Iraq-subcontractor matter and stated that reserves for the FKTC matter were adequate.
- Other litigation: The North West Rail Link joint venture faces claims of approximately A$301 million. KBR’s 33% participation interest and joint-and-several obligations could expose it to material amounts exceeding current reserves, although insurance coverage is expected to apply.
- COVID-19 and project execution: The pandemic may delay arbitration and other proceedings and may affect project costs, schedules, estimates of recoveries and liquidity requirements.
- Financial risks: After hedging, KBR had approximately $1.1 billion of fixed-rate debt and $558 million of variable-rate debt. A 50-basis-point increase in rates was estimated to increase pretax interest expense by approximately $3 million over the next 12 months.
Investor Verification Points
- Verify the sustainability of earnings improvement after excluding Q1 2020 impairment and restructuring charges.
- Assess whether the sharp STS revenue decline reflects a completed portfolio transition or continuing execution and volume risk.
- Monitor Ichthys arbitration outcomes, potential Funding Deed repayment, additional JKC funding needs and letters-of-credit exposure.
- Reconcile reported cash with restricted joint-venture and project cash that is not generally available for corporate purposes.
- Review leverage, covenant headroom, debt maturities and the refinancing or repayment requirements for the 2023 convertible notes, 2025 credit facilities and 2027 term loan.
- Track pension funding requirements, government-contract litigation and the North West Rail Link claim.
- Confirm the assumptions supporting the $11.6 billion remaining performance obligations and $14.6 billion backlog, including customer funding, options and termination provisions.