KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing text does not correspond to the requested “2020 Q3” period. Financial statements are unaudited and presented in millions, except per-share data.
Business context
KBR provides government services and sustainable technology solutions. Its reportable segments are Government Solutions (GS), Sustainable Technology Solutions (STS), and Other. Effective January 1, 2021, KBR reorganized from three core segments into GS and STS. The October 2020 Centauri acquisition expanded government technology and national-security capabilities.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $1,843 | $1,379 | $4,840 | $4,301 |
| Gross profit | $193 | $172 | $568 | $500 |
| Operating income | $101 | $93 | $102 | $12 |
| Net income attributable to KBR | $55 | $52 | $(50) | $(91) |
| Diluted EPS | $0.38 | $0.36 | $(0.36) | $(0.64) |
| Cash flow from operations | Not separately provided | Not separately provided | $276 | $245 |
Q3 gross margin was approximately 10.5%, versus 12.5% in the prior-year quarter; operating margin was approximately 5.5%, versus 6.7%. Nine-month gross margin was approximately 11.7%, versus 11.6%; operating margin was approximately 2.1%, versus 0.3%. The nine-month net loss reflected significant equity-method charges related to the Ichthys LNG project.
- Segment revenue: GS revenue increased 54% in Q3 to $1,555 and 34% for nine months to $3,950. STS revenue declined 21% in Q3 to $288 and 34% for nine months to $890, primarily following KBR’s exit from commoditized construction services.
- Segment gross profit: GS gross profit increased to $147 in Q3 and $393 for nine months. STS gross profit increased to $46 in Q3 and $175 for nine months despite lower revenue.
- Equity-method results: Equity in unconsolidated affiliates was a $1 loss in Q3 and a $175 loss for nine months, compared with income of $13 and $30, respectively, in the prior-year periods.
- Cash and liquidity: Cash and equivalents were $550 at September 30, 2021, versus $436 at December 31, 2020. Operating cash flow was $276 for nine months; investing cash flow was $(22) and financing cash flow was $(140).
- Receivables: Accounts receivable increased to $1,245 from $899 at year-end, while contract assets increased to $227 from $178. KBR derecognized $1,609 of receivables under receivables-sale programs during the nine months; $113 remained outstanding with financial institutions at September 30.
- Debt: Total debt was $1,594, including $260 drawn under the Revolver, $786 of term loans, $350 of convertible notes, and $250 of senior notes. Long-term debt, net of current maturities, was $1,578.
- Credit capacity: The Senior Credit Facility has aggregate capacity of $1.795 billion, including a $1 billion Revolver. Approximately $820 of committed and uncommitted letter-of-credit capacity remained available. KBR was in compliance with its debt covenants.
- Capital allocation: KBR paid $45 of dividends and repurchased $53 of common stock under its authorization during the first nine months. The quarterly dividend was $0.11 per share, and $250 remained available under the repurchase program.
- Backlog: Total backlog was $14.759 billion at September 30, down from $15.115 billion at year-end. Remaining performance obligations under ASC 606 were $11.2 billion, with approximately 26% expected to be recognized within one year.
Material changes versus the prior comparable periods
- Revenue growth was driven by GS organic growth, Operation Allies Welcome humanitarian-support work, and the Centauri acquisition, partly offset by Afghanistan-related volume reductions and lower Aspire activity.
- Operating income improved materially because the prior-year periods included $99 of goodwill impairment and $176 of restructuring and asset-impairment charges; 2021 included only $2 of restructuring and asset-impairment charges for nine months.
- Interest expense increased to $23 in Q3 and $68 for nine months, primarily because of debt incurred to finance Centauri.
- STS revenue declined, but STS gross profit improved because of better execution, market recovery, and the absence of certain 2020 charges.
- Reported nine-month earnings were adversely affected by a $193 non-cash charge in Q2 and an additional approximately $10 charge in Q3 related to KBR’s share of Ichthys LNG project matters.
- Accounts payable increased to $964 from $574 at year-end, contributing to operating cash flow, while accounts receivable growth consumed cash.
Guidance, outlook, risks, and unusual items
- Management expects continued opportunities in defense modernization, space, cybersecurity, emerging technologies, energy transition, decarbonization, hydrogen, green ammonia, and circular-economy solutions. No specific revenue or earnings guidance is provided in the filing text.
- In October 2021, after the reporting date, JKC entered into a settlement agreement resolving outstanding Ichthys LNG claims and disputes with its client. The settlement reduced KBR’s letters of credit related to the project from $164 to $82. It did not resolve KBR’s pursuit of approximately $1.7 billion of JKC claims against the power-plant consortium; the arbitration’s final hearing was expected in April-May 2022.
- Also after quarter-end, on October 20, 2021, KBR acquired Frazer-Nash Consultancy for approximately $402, funded with $294 of Revolver borrowings and $108 of international cash. Purchase accounting information was not yet available at the filing date.
- KBR has a $310 pension obligation balance and expects approximately $49 of 2021 pension contributions, of which $35 had been paid through September 30.
- Material contingencies include U.S. government contract audits and litigation, LogCAP III closeout matters, False Claims Act proceedings, the North West Rail Link claim of up to approximately A$301 million, and potential exposure from joint-venture guarantees and joint-and-several liability. The filing states that the maximum potential payments under certain performance guarantees cannot be estimated.
- COVID-19 vaccination requirements could cause employee attrition or difficulty securing labor. The company required employees to be fully vaccinated by December 8, 2021.
- Fixed-price projects, cost-estimate revisions, resource availability, inflationary costs, productivity, weather, foreign exchange, interest rates, and customer funding or termination rights may affect future profitability and cash flow.
Most important facts to verify
- Reconcile the requested 2020 Q3 period with the filing’s actual September 30, 2021 reporting period.
- Assess the sustainability of GS growth, including the contribution and duration of Operation Allies Welcome and Centauri-related revenue.
- Evaluate STS’s lower revenue but improved gross profit and its exposure to legacy project claims.
- Review the Ichthys settlement, remaining power-plant arbitration exposure, contingent liability, and potential future funding requirements.
- Update leverage and liquidity after the post-quarter-end Frazer-Nash acquisition and $294 of Revolver borrowings.
- Examine the quality of operating cash flow, including the significant increase in accounts payable and the use of receivables monetization.
- Monitor pension funding, U.S. government contract matters, joint-venture guarantees, and other litigation reserves.
- Confirm backlog conversion, customer funding, fixed-price exposure, and the $5.2 billion of priced U.S. government option periods excluded from reported backlog.