KBR, Inc. Form 10-Q Summary
Reporting period: The filing covers the three and six months ended June 30, 2022. The request metadata refers to “2021 Q2,” but the filing is a 2022 second-quarter Form 10-Q; 2021 amounts are presented as the comparable period and reflect the retrospective adoption of ASU 2020-06.
Business Context
KBR provides government solutions, defense and intelligence services, space and science support, engineering and technology services, and sustainable technology solutions. Its reportable segments are Government Solutions (GS) and Sustainable Technology Solutions (STS), with corporate activities reported in Other. The company’s growth priorities include defense modernization, space, health and human performance, and sustainable technology.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue | $1.616 billion | $1.536 billion | $3.330 billion | $2.997 billion |
| Gross profit | $201 million | $207 million | $397 million | $375 million |
| Gross margin | 12.4% | 13.5% | 11.9% | 12.5% |
| Operating income (loss) | $127 million | $(88) million | $96 million | $1 million |
| Net income (loss) attributable to KBR | $94 million | $(149) million | $23 million | $(100) million |
| Diluted EPS | $0.61 | $(1.06) | $0.17 | $(0.71) |
| Cash flow from operations | Not separately provided | Not separately provided | $214 million | $154 million |
Q2 revenue increased 5%, while six-month revenue increased 11%. GS drove growth, with six-month revenue up 16% to $2.771 billion and gross profit up 27% to $313 million. STS six-month revenue declined 7% to $559 million and gross profit declined 35% to $84 million.
The Q2 operating margin was approximately 7.9%, compared with negative 5.7% in the prior-year quarter. Six-month operating margin was approximately 2.9%, compared with approximately 0.0% in the prior-year period. The improvement in operating income primarily reflects the absence of a significant 2021 Ichthys LNG-related equity loss.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $516 million at June 30, 2022, compared with $370 million at December 31, 2021. Approximately $115 million was held by consolidated joint ventures and Aspire Defence entities and was restricted to project activities.
- Operating cash flow was $214 million for the six months, supported by collections of accounts receivable and working-capital movements.
- Investing cash flow was $169 million, including approximately $189 million received from the JKC subcontractor settlement and $55 million of proceeds from U.K. road project dispositions, partly offset by the $61 million initial investment in Mura Technology and $19 million of capital expenditures.
- Financing cash flow was $(215) million, including $105 million of debt repayments, $32 million of dividends, and $74 million of share repurchases.
- Total debt was approximately $1.762 billion, including $1.746 billion of long-term debt net of current maturities. Debt declined from approximately $1.891 billion at December 31, 2021.
- The company had $1 billion of committed revolving capacity and $450 million of bilateral and uncommitted credit lines supporting letters of credit. Approximately $900 million of combined capacity remained available at June 30, 2022.
- KBR was in compliance with its debt covenants and stated that cash, operating cash flow, credit availability and other credit lines were sufficient for the next 12 months.
Material Changes and Unusual Items
- The six-month results included a $137 million non-cash equity loss related to the Ichthys LNG project subcontractor settlement. KBR received approximately $190 million from the first settlement payment and expects a second payment of approximately AUD 90 million in March 2023.
- The prior-year comparable periods included a $193 million non-cash Ichthys LNG-related charge, making year-over-year earnings comparisons unusually favorable in 2022.
- KBR recognized a $16 million unrealized gain on its Mura Technology investment and entered into an agreement to invest an additional $100 million, with approximately $40 million expected to be funded in 2023.
- KBR recognized a $22 million gain on asset and investment dispositions, including gains from U.K. road projects and a property sale.
- Russia-related business exits reduced six-month revenue by approximately $27 million and gross profit by approximately $22 million; KBR also incurred $6 million of severance and asset impairment costs.
- Backlog increased to $15.387 billion at June 30, 2022 from $14.973 billion at year-end 2021. STS backlog increased substantially, partly due to the Plaquemines LNG project, while GS backlog declined.
- Remaining performance obligations were $11.2 billion, with approximately 37% expected to be recognized within one year, 36% in years two through five, and 27% thereafter.
- On August 2, 2022, after quarter-end, KBR acquired U.K.-based VIMA Group for approximately $73 million in cash, plus $5 million of deferred consideration and potential contingent payments of up to approximately $12 million.
Outlook, Risks and Contingencies
Management expects continued opportunities from increased U.S., U.K. and Australian defense spending, cyber capabilities, space, energy transition, decarbonization, hydrogen, green ammonia and circular-economy technologies. The filing does not provide a specific quantitative revenue or earnings outlook.
- The Russia-Ukraine conflict, sanctions, trade controls, supply-chain disruption, inflation, labor and equipment costs, foreign exchange volatility and cyber threats could adversely affect results.
- Fixed-price contracts expose KBR to cost overruns and inflation, while project estimates can change because of productivity, weather, resource availability, contract negotiations and claims outcomes.
- KBR had $72 million accrued for probable and reasonably estimable unallowable costs related to open U.S. government matters.
- The HomeSafe Alliance contract, with a ceiling value of $20 billion and a potential nine-year term, remained subject to protests and its transition was on hold.
- The North West Rail Link joint venture faces Australian claims of up to approximately AUD 301 million; KBR had accrued an immaterial probable loss and expects insurance coverage subject to deductibles.
- KBR maintains a $38 million U.K. pension funding deficit and expects minimum annual contributions of approximately £33 million through March 2028, subject to future actuarial reviews.
- The company settled a U.S. government False Claims Act matter for a $12 million payment in Q2 2022, which had previously been fully accrued. Other government investigations and litigation remain unresolved.
Investor Verification Priorities
- Verify the sustainability of earnings excluding the nonrecurring Ichthys-related comparison effects, investment gains and asset disposition gains.
- Track STS margins, Russia exit costs, project estimates and the remaining exposure to legacy LNG and other joint-venture matters.
- Assess cash conversion, including reliance on receivables monetization and settlement proceeds, and distinguish unrestricted cash from project-restricted cash.
- Monitor debt maturities, variable-rate exposure, the $350 million convertible notes due in 2023, and compliance with leverage and interest-coverage covenants.
- Evaluate backlog conversion, funding and customer options, particularly the Plaquemines LNG and HomeSafe programs.
- Review the financial contribution and purchase-accounting effects of the post-quarter-end VIMA acquisition and the planned additional Mura investment.