KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. The request identifies “2022 Q2,” but the supplied filing is KBR’s 2023 second-quarter Form 10-Q, with 2022 comparative figures. Financial statements are unaudited.
Business Context
KBR provides government solutions in defense, intelligence, space, aviation and infrastructure, and Sustainable Technology Solutions focused on energy transition, process technologies, engineering and digital asset optimization. Reportable segments are Government Solutions (GS), Sustainable Technology Solutions (STS) and Other.
At June 30, 2023, backlog was $16.9 billion, including $11.8 billion in GS and $5.1 billion in STS, compared with $15.6 billion at December 31, 2022. Remaining performance obligations under ASC 606 were $11.5 billion; approximately 40% is expected to be recognized within one year.
Financial Performance and Liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.753 billion, up 8% | $3.456 billion, up 4% |
| Gross profit | $251 million; 14.3% margin | $496 million; 14.4% margin |
| Operating income | $10 million; 0.6% margin | $154 million; 4.5% margin |
| Net income attributable to KBR | $(351) million; $(2.60) diluted EPS | $(265) million; $(1.95) diluted EPS |
| Operating cash flow | Not separately provided | $288 million |
Six-month operating cash flow increased from $214 million in 2022. Investing cash flow was $(21) million, primarily reflecting $38 million of capital expenditures and a $39 million investment in Mura Technology, partly offset by a $61 million return of investment from JKC. Financing cash flow was $(126) million after debt activity, share repurchases and dividends. Cash increased to $539 million from $389 million at December 31, 2022.
Total debt was $1.745 billion at June 30, 2023, including $515 million outstanding under the Senior Credit Facility and $250 million of remaining Convertible Notes principal. Current maturities were $117 million and long-term debt was $1.628 billion, net of current maturities and issuance costs. KBR was in compliance with its debt covenants. Available capacity under committed and uncommitted lines supporting letters of credit was approximately $588 million.
Accounts receivable were $1.022 billion and contract liabilities were $325 million. KBR derecognized $1.550 billion of receivables through monetization programs during the first six months, including $1.521 billion under the MUFG receivables purchase agreement.
Material Changes Versus Prior Comparable Period
- Revenue increased $137 million, or 8%, in the quarter and $126 million, or 4%, year to date.
- STS revenue increased 32% in the quarter and 39% year to date, while STS operating income rose to $77 million in the quarter and $159 million year to date.
- GS revenue increased 3% in the quarter but declined 3% year to date, primarily because approximately $305 million of 2022 revenue from the Operation Allies Welcome contingency program did not recur and Aspire construction activity ramped down.
- GS operating income declined to a $28 million loss in the quarter and $74 million for the first six months, primarily due to a $144 million legacy legal settlement charge and the nonrecurrence of prior-year asset-disposition gains.
- Gross profit increased 25% in both the quarter and first six months. The year-to-date improvement also reflected the absence of a $137 million non-cash Ichthys LNG-related charge recorded in 2022.
- Net results were adversely affected by $314 million of Convertible Notes-related charges, comprising $104 million from derivative bifurcation, $70 million from debt extinguishment, $12 million from warrant settlement and $128 million of debt-discount accretion.
- KBR repurchased $125 million of common stock under its authorization and paid $35 million of dividends during the first six months. $326 million remained available under the $500 million authorization at June 30, 2023.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing cash, operating cash flow, Senior Credit Facility availability and other credit lines are sufficient to support operations for the next 12 months. No specific quantitative earnings or revenue guidance is provided in the supplied filing.
- Management expects continued opportunities from defense modernization, space, cyber, AUKUS-related priorities, energy transition, decarbonization, hydrogen, green ammonia and circular-economy technologies.
- U.S. government funding remains subject to statutory spending caps, appropriations uncertainty, continuing resolutions and possible government shutdowns. The effect on individual programs and KBR cannot be predicted.
- Project profitability is sensitive to labor, materials, equipment, productivity, weather, fixed-price execution, contract estimates, claims and change orders. Unapproved change orders and claims included in project estimates totaled $59 million at June 30, 2023.
- The company recorded a $144 million charge for the Howard qui tam settlement; $109 million was paid on July 10, 2023. KBR denied liability or wrongful conduct.
- Legacy U.S. government matters, including LogCAP III closeout and FKTC arbitration-related claims, remain outstanding. KBR seeks a $16 million net award from FKTC, while FKTC asserts potential offsets and a separate $100 million Kuwait claim; no amounts were accrued for these matters at June 30, 2023.
- The remaining $250 million Convertible Notes mature November 1, 2023 and are classified as current liabilities. KBR elected cash settlement and funded the repurchase of $100 million principal partly with Revolver borrowings.
- KBR has a $75 million U.K. pension surplus but expects minimum annual contributions of approximately £33 million through March 2028. Higher future funding requirements could affect liquidity.
- Interest-rate exposure remains material despite swaps. At June 30, 2023, fixed-rate debt was approximately $1.5 billion and variable-rate debt was approximately $414 million; a 50-basis-point increase was estimated to increase next-12-month pretax interest expense by approximately $2 million.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting, other than substantial completion of the Corporate ERP implementation.
Investor Verification Priorities
- Verify the filing period: the supplied document is for Q2 2023, not Q2 2022.
- Reconcile reported net loss with the $314 million Convertible Notes charge and the $144 million legal settlement, distinguishing recurring operating performance from unusual items.
- Assess debt refinancing and cash requirements surrounding the $250 million Convertible Notes maturity in November 2023 and the July 2023 additional $200 million Term Loan A tranche.
- Evaluate reliance on receivables monetization, restricted joint-venture and Aspire cash, and available letter-of-credit capacity.
- Monitor GS execution, government appropriations, OAW revenue comparisons, Aspire ramp-down and fixed-price contract exposure.
- Review Ichthys LNG, FKTC, LogCAP III, government audit and other legal contingencies, including potential losses not currently estimable.
- Validate backlog conversion, customer funding, contract termination rights and the $4.2 billion of unexercised U.S. government priced options.