KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. The filing metadata references “2018 Q2,” but the filing itself is a 2019 Form 10-Q. KBR provides government services, technology solutions and energy-related engineering, procurement and construction services.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.422 billion, up 12% | $2.762 billion, up 20% |
| Gross profit | $160 million vs. $161 million | $313 million vs. $278 million |
| Gross margin | 11.3% vs. 12.7% | 11.3% vs. 12.1% |
| Operating income | $92 million vs. $100 million | $170 million vs. $279 million |
| Operating margin | 6.5% vs. 7.9% | 6.2% vs. 12.1% |
| Net income attributable to KBR | $48 million vs. $44 million | $88 million vs. $180 million |
| Diluted EPS | $0.34 vs. $0.31 | $0.62 vs. $1.27 |
| Cash flow from operations | Not separately provided | $81 million vs. $(36) million |
Quarterly revenue growth was driven primarily by Government Solutions and Technology Solutions, partly offset by lower Energy Solutions revenue. Six-month earnings comparisons were affected by the absence of the $115 million gain from consolidating Aspire Defence recognized in 2018. Interest expense increased to $51 million for the six months from $23 million.
- Government Solutions: Six-month revenue increased 30% to $2.008 billion and gross profit increased 30% to $202 million, supported by Logistics, Engineering, new Space and Mission Solutions programs and the SGT acquisition.
- Technology Solutions: Six-month revenue increased 38% to $185 million and gross profit increased 10% to $53 million; margins were pressured by a higher mix of lower-margin proprietary equipment sales.
- Energy Solutions: Six-month revenue declined 9% to $568 million and gross profit declined 25% to $58 million, primarily due to project completions, lower Ichthys activity and the non-recurrence of a 2018 Australian LNG performance-related item.
Liquidity, Debt and Capital Resources
- Cash and equivalents were $611 million at June 30, 2019, down from $739 million at December 31, 2018. Approximately $304 million was held by joint ventures and Aspire project entities and was restricted to project-related activities.
- Total long-term debt was $1.215 billion before the current portion; long-term debt net of current maturities was $1.188 billion. Debt included $945 million of term loans and $350 million of convertible notes, net of issuance costs and discounts.
- The company had no revolver borrowings, $26 million of revolver letters of credit and $98 million of performance letters of credit. Approximately $218 million of uncommitted credit lines was used for letters of credit. KBR reported approximately $1.0 billion of remaining letter-of-credit capacity.
- KBR was in compliance with its financial covenants at June 30, 2019. The company stated that cash balances, operating cash flow and available credit were sufficient for at least the next 12 months.
- Operating cash flow of $81 million was supported by $45 million of distributions from unconsolidated affiliates but was reduced by a $118 million increase in accounts receivable. Investing cash outflow was $131 million, primarily from $126 million invested in the Ichthys LNG joint venture.
- KBR declared $0.16 per share of dividends during the first six months.
Material Changes and Unusual Items
- Revenue increased substantially in Government Solutions and Technology Solutions, while Energy Solutions declined.
- The 2018 comparison included a $115 million gain from consolidation of Aspire Defence entities; no comparable gain was recorded in 2019.
- KBR recorded $10 million of gains on asset dispositions in the first six months of 2019.
- Effective January 1, 2019, KBR adopted the new lease standard, recognizing $185 million of operating lease right-of-use assets and $253 million of operating lease liabilities at adoption. The company stated that adoption did not materially affect operations or cash flows.
- KBR corrected previously issued financial statements for an immaterial historical error involving equity earnings and foreign-currency calculations. The cumulative error through March 31, 2019 was approximately $23 million of overstated net income, with no impact on previously reported cash flows.
Outlook, Risks and Contingencies
Management described the government-services outlook as favorable, citing defense and space spending, recurring services and long-term U.K. private-finance contracts. KBR also identified opportunities in LNG, midstream, petrochemicals, chemicals and fertilizers, while noting that hydrocarbons demand remains sensitive to commodity prices and customer capital spending. The filing does not provide a specific quantitative earnings or revenue guidance range.
- Ichthys LNG: KBR owns 30% of JKC and had contributed approximately $126 million during the first six months of 2019. Total contributions to complete the project were projected at approximately $500 million. The company had $164 million of letters of credit outstanding for performance and warranty obligations.
- Ichthys-related claims and unapproved change orders included approximately $979 million in project estimates at June 30, 2019, including KBR’s share of disputed amounts. Certain client-funded amounts could require repayment if unresolved by December 31, 2020.
- JKC had approximately $1.9 billion of claims against the consortium that abandoned the power-plant subcontract. KBR could bear its pro rata share of unrecovered completion costs and may need to provide additional funding if recovery efforts fail.
- KBR had a $219 million pension obligation deficit and agreed to minimum U.K. pension contributions of $45 million annually from 2019 through the next valuation.
- U.S. government Form 1s questioned $134 million of billed costs; $73 million remained recorded as claims and accounts receivable. KBR also had a $41 million reserve for unallowable costs.
- The company remains subject to U.S. government audits, litigation, False Claims Act matters, the Unaoil investigations and other legal proceedings. The filing states that outcomes may be lengthy and uncertain.
- Contract estimates include claims, change orders and recoveries that may prove inaccurate. Fixed-price contracts, joint-and-several guarantees, customer disputes, funding delays, foreign exchange and government budget changes could materially affect results and liquidity.
Investor Verification Checklist
- Confirm the applicable reporting period is June 30, 2019, rather than 2018 Q2.
- Assess the sustainability of Government Solutions growth and the lower margins in Energy Solutions and Technology Solutions.
- Monitor Ichthys funding requirements, disputed claims, arbitration outcomes, client repayment demands and the potential for additional guarantees or cash contributions.
- Reconcile reported cash of $611 million with restricted joint-venture and project cash balances and available credit capacity.
- Review debt maturities, variable-rate exposure, covenant headroom and the $350 million convertible notes due in 2023.
- Track U.S. government claims, Form 1 disputes, reserves and related litigation or investigation developments.
- Evaluate pension funding requirements, lease obligations and the effect of the corrected historical accounting error on prior-period comparisons.