KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. The request metadata identifies “2019 Q2,” but the filing itself is KBR’s 2020 second-quarter Form 10-Q, filed August 6, 2020.
Business Context and Reporting Period
KBR provides professional services, project solutions and technologies across Government Solutions, Technology Solutions and Energy Solutions, with substantially completed non-strategic activities. Management began transitioning from a three-segment model to a two-segment model focused on Government Solutions and Technology Solutions, including the planned integration of selected Energy Solutions offerings.
The period was materially affected by COVID-19, the oil-price decline, reduced energy-market activity and related operational disruption. KBR initiated restructuring activities and discontinued pursuing certain lump-sum EPC and commoditized construction projects.
Key Financial Metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $1.385 billion | $1.422 billion | $2.922 billion | $2.762 billion |
| Gross profit | $142 million | $160 million | $328 million | $313 million |
| Gross margin | 10.3% | 11.3% | 11.2% | 11.3% |
| Operating income (loss) | $(12) million | $92 million | $(81) million | $170 million |
| Net income (loss) attributable to KBR | $(39) million | $48 million | $(143) million | $88 million |
| Diluted earnings (loss) per share | $(0.28) | $0.34 | $(1.00) | $0.62 |
| Cash flow from operations | Not separately provided | Not separately provided | $150 million | $81 million |
Second-quarter gross profit declined 11%, while six-month gross profit increased 5%. The six-month operating loss included $99 million of goodwill impairment and $175 million of restructuring charges and asset impairments. Interest expense declined to $19 million in the quarter and $42 million year to date, compared with $26 million and $51 million, respectively, in the prior-year periods.
Cash and equivalents were $635 million at June 30, 2020, compared with $712 million at December 31, 2019. Total assets were $5.010 billion and total liabilities were $3.368 billion. Long-term debt, net of current maturities, was $1.065 billion, compared with $1.183 billion at year-end 2019. KBR was in compliance with its debt covenants.
Segment Performance and Material Changes
- Government Solutions: Second-quarter revenue declined 10% to $925 million, primarily from completed disaster-recovery work, lower LogCAP IV activity and reduced Aspire Defence construction activity. Gross profit increased 2% to $114 million. Six-month revenue declined 6% to $1.880 billion, while gross profit increased 19% to $241 million.
- Technology Solutions: Second-quarter revenue declined 22% to $73 million and gross profit declined 12% to $23 million, primarily because of lower proprietary-equipment sales. Six-month revenue declined 13% to $161 million, with gross profit broadly stable at $52 million.
- Energy Solutions: Second-quarter revenue increased 31% to $387 million, but gross profit declined 73% to $6 million because of lower-margin project mix and reduced joint-venture activity. Six-month revenue increased 55% to $878 million, while gross profit declined 31% to $40 million.
- Backlog: Total backlog declined to $12.587 billion from $14.636 billion at December 31, 2019. Energy Solutions backlog fell to $1.509 billion from $3.097 billion, including approximately $1.2 billion of projects that management decided not to pursue.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $150 million for the first six months, supported by noncash impairment and restructuring charges and working-capital changes.
- Investing cash outflow was $25 million, including $9 million for the SMA acquisition and $12 million of investments in equity-method joint ventures.
- Financing cash outflow was $183 million, including $150 million of net debt repayments and $26 million of dividends.
- The February 2020 refinancing established a $500 million revolving facility, a $500 million performance letter-of-credit facility, a $275 million Term Loan A and a $520 million Term Loan B. On July 2, 2020, the performance-letter-of-credit capacity was converted to revolving capacity, increasing the revolver to $1 billion while keeping total senior-facility commitments at $1.795 billion.
- At June 30, 2020, KBR had $331 million of outstanding letters of credit under committed and uncommitted lines and approximately $1.0 billion of remaining capacity. Management stated that available cash, operating cash flow and credit capacity should support operations for the next 12 months.
Guidance, Outlook, Risks and Unusual Items
- Management expects restructuring activities to be substantially completed in 2020, although additional activities could be approved.
- The company is emphasizing differentiated, technology-enabled, less volatile markets and energy-transition offerings while exiting higher-risk construction work.
- COVID-19, oil-market volatility, reduced customer capital spending, supply-chain disruption, workforce availability, contract delays and potential government-budget pressure remain significant risks.
- The Ichthys LNG project remains subject to extensive commercial and legal disputes. KBR’s proportionate share of unapproved change orders and claims was $955 million at June 30, 2020. JKC’s claims against the power-plant consortium were approximately $1.8 billion, but recovery is uncertain.
- KBR had contributed approximately $484 million to JKC on an inception-to-date basis and had $164 million of Ichthys-related letters of credit outstanding. An unfavorable outcome could require additional funding or repayment obligations.
- The company recognized $99 million of goodwill impairment, $175 million of restructuring and asset-impairment charges, and a $72 million restructuring liability at June 30, 2020.
- Other contingencies include U.S. government contract disputes, False Claims Act matters, the FKTC litigation, and the North West Rail Link claims. The filing states that potential losses for some matters cannot be estimated reliably or may exceed recorded reserves.
Most Important Facts to Verify
- Whether Energy Solutions restructuring and project exits improve margins and reduce future cash requirements.
- The collectability and ultimate resolution of Ichthys claims, including the $1.8 billion power-plant arbitration and the potential December 31, 2020 Funding Deed repayment exposure.
- Whether backlog conversion, particularly the $10.517 billion Government Solutions backlog, offsets the $1.6 billion Energy Solutions backlog reduction.
- Future operating cash generation relative to debt service, pension funding, dividends, joint-venture funding and letter-of-credit requirements.
- The effect of COVID-19, oil prices and customer capital-spending reductions on new awards, project execution and receivable collection.
- Progress on the planned transition to the two-segment operating model and whether additional impairment or restructuring charges arise.