KBR, Inc. Form 10-Q Summary
Reporting period: The filing covers the three and six months ended June 30, 2021, with comparisons to June 30, 2020. The request metadata identifies “2020 Q2,” but the provided filing is KBR’s second-quarter 2021 Form 10-Q, filed July 29, 2021.
Business context
KBR provides government services and sustainable technology, engineering and advisory solutions. Effective January 1, 2021, the company reorganized its reporting structure into Government Solutions, Sustainable Technology Solutions and Other. The October 2020 acquisition of Centauri expanded Government Solutions’ space, intelligence, cyber and national-security capabilities.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,536 million | $1,385 million | $2,997 million | $2,922 million |
| Gross profit | $207 million | $142 million | $375 million | $328 million |
| Gross margin | 13.5% | 10.3% | 12.5% | 11.2% |
| Operating income (loss) | $(88) million | $(12) million | $1 million | $(81) million |
| Net loss attributable to KBR | $(152) million | $(39) million | $(105) million | $(143) million |
| Diluted loss per share | $(1.08) | $(0.28) | $(0.75) | $(1.00) |
| Operating cash flow | Not separately provided | Not separately provided | $154 million | $150 million |
Gross profit improved despite the quarterly operating loss. Results were heavily affected by a $193 million non-cash charge to equity in earnings of unconsolidated affiliates related to the Ichthys LNG project. Six-month selling, general and administrative expense increased to $192 million from $170 million, while interest expense increased to $45 million from $42 million.
At June 30, 2021, cash and equivalents were $483 million, compared with $436 million at December 31, 2020. Total assets were $5.5 billion and total shareholders’ equity was $1.5 billion. Total debt was approximately $1.6 billion, including $1.585 billion of long-term debt net of current maturities.
Segment performance and material changes
- Government Solutions: Q2 revenue increased 29% to $1.231 billion, driven by organic growth, new program wins, on-contract expansion and approximately $180 million of Centauri revenue. Gross profit increased 11% to $130 million. Six-month revenue increased 24% to $2.395 billion, while six-month gross profit was unchanged at $246 million.
- Sustainable Technology Solutions: Q2 revenue declined 29% to $305 million and six-month revenue declined 39% to $602 million, primarily because KBR exited commoditized construction services. Q2 gross profit increased to $77 million from $25 million, but equity-method results included the $193 million Ichthys charge.
- Exceptional items: The prior-year periods included $37 million of Q2 goodwill impairment, $99 million of six-month goodwill impairment and $175 million of six-month restructuring and asset impairment charges. These charges were substantially absent in 2021.
- Backlog: Total backlog was $14.886 billion at June 30, 2021, down from $15.115 billion at December 31, 2020. Remaining performance obligations under ASC 606 were $11.5 billion, with approximately 30% expected to be recognized within one year.
Cash flow, liquidity and capital allocation
- Six-month operating cash flow was $154 million, compared with $150 million in 2020. Investing cash outflow was $38 million and financing cash outflow was $74 million, resulting in a $47 million increase in cash.
- KBR sold or monetized $553 million of receivables during the first six months, including $543 million under the MUFG receivables purchase agreement. Outstanding balances sold to financial institutions were $119 million at June 30.
- The amended Senior Credit Facility has aggregate capacity of $1.795 billion, including a $1 billion revolving facility. Approximately $781 million of committed and uncommitted letter-of-credit capacity remained available.
- KBR was in compliance with its debt covenants at June 30, 2021. Management stated that cash, operating cash flow, credit availability and other lines of credit were sufficient for the next 12 months.
- The company paid $30 million of dividends and repurchased $28 million of common stock during the first six months. The remaining share-repurchase authorization was $275 million.
Guidance, outlook and principal risks
Management highlighted favorable demand for defense modernization, space, cyber, artificial intelligence and sustainable technologies, including decarbonization, carbon capture, hydrogen, green ammonia and circular-economy solutions. The filing does not provide a clear quantitative revenue or earnings guidance range. Management estimated a 25% 2021 effective tax rate excluding discrete items.
- Ichthys LNG disputes: KBR’s 30%-owned JKC joint venture faces unresolved client, subcontractor and parent-guarantee disputes. KBR’s proportionate share of Funding Deed-related claims was $157 million, and KBR had contributed approximately $484 million to JKC on an inception-to-date basis. An adverse outcome could require additional funding and materially affect cash flow and financial position.
- JKC’s claims against the power-plant subcontractor consortium were approximately $1.8 billion as of June 30, 2021, but recovery is uncertain and subject to arbitration.
- KBR had $164 million of letters of credit supporting Ichthys performance and warranty obligations. Joint-and-several liability in joint ventures could expose KBR to amounts exceeding its ownership percentage.
- The company has ongoing U.S. government contract matters, including False Claims Act litigation and LogCAP III close-out disputes. KBR accrued its best estimate of probable loss in one DOJ matter, while other matters remain unaccrued or uncertain.
- The U.K. pension deficit was $339 million at the measurement date, and KBR expected approximately $50 million of pension contributions for 2021, of which $24 million had been paid by June 30.
- Fixed-price project execution, claims recoverability, customer funding, foreign exchange, interest rates, COVID-19 effects and the phased implementation of the company-wide ERP system remain relevant risks.
Most important facts to verify
- Whether the Ichthys LNG disputes result in repayment obligations, additional capital calls or further earnings charges.
- The sustainability of operating cash flow, particularly given receivables monetization and restricted joint-venture cash.
- Progress and profitability of Government Solutions following the Centauri acquisition.
- Whether Sustainable Technology Solutions can replace revenue lost from exited commoditized construction activities.
- Debt covenant compliance, refinancing requirements and the maturity profile of the 2023 convertible notes, 2025 credit facilities and 2027 Term Loan B.
- Potential exposure from U.S. government litigation, joint-and-several guarantees, pension funding and other unrecorded contingencies.