KBR, Inc. Form 10-Q Summary
Business context and reporting period
KBR is a global engineering, procurement, construction and services company serving hydrocarbons, infrastructure and government-services markets. The filing covers the three months ended March 31, 2016, compared with the corresponding 2015 period. The company reports Technology & Consulting, Engineering & Construction, Government Services, Non-strategic Business and Other segments.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $996 million | $1,436 million | Down 31% |
| Gross profit | $68 million | $70 million | Down 3% |
| Gross margin | 6.8% | 4.9% | Up 1.9 percentage points |
| Operating income | $65 million | $64 million | Up 2% |
| Operating margin | 6.5% | 4.5% | Up 2.0 percentage points |
| Net income attributable to KBR | $42 million | $44 million | Down 5% |
| Diluted EPS | $0.30 | $0.30 | Flat |
| Operating cash flow | $(21) million | $(108) million | Improved by $87 million |
Equity earnings from unconsolidated affiliates were $29 million, versus $35 million. General and administrative expense declined to $34 million from $39 million. The effective tax rate was approximately 25%, compared with 27% in the prior-year quarter.
Cash and equivalents were $824 million at March 31, 2016, down from $883 million at December 31, 2015. Total assets were $3.37 billion and shareholders’ equity was $1.11 billion. Total nonrecourse project debt was $60 million. KBR had no cash borrowings under its $1.0 billion unsecured revolving credit facility and had $119 million of letters of credit outstanding under that facility. The company stated that it was in compliance with its financial covenants.
Cash used in investing activities was $25 million, including $22 million for the acquisition of three Chematur technology businesses. Cash used in financing activities was $18 million, including $11 million of dividends and $6 million of distributions to noncontrolling interests. The quarterly dividend was $0.08 per share.
Material changes versus the prior comparable period
- Revenue declined primarily because of the deconsolidation of Industrial Services Americas, the sale or completion of non-strategic businesses and reduced activity on a major Australian LNG project.
- Engineering & Construction revenue fell to $606 million from $977 million, and gross profit fell to $29 million from $55 million. Results included a $4 million net charge for increased estimated costs on a U.S. EPC ammonia project, partly offset by favorable claims settlements.
- Government Services revenue increased to $210 million from $155 million. Gross profit improved to $21 million from a $4 million gross loss, driven by an approved Middle East change order and growth in U.S. government and international contracts.
- Technology & Consulting revenue increased to $97 million from $72 million, while gross profit decreased to $17 million from $19 million. The quarter included $10 million of revenue from the Chematur acquisition.
- Non-strategic Business revenue declined to $83 million from $232 million as businesses were sold and projects were completed.
- Backlog was $12.0 billion at March 31, 2016, down from $12.3 billion at December 31, 2015. Government Services backlog increased to $6.9 billion, while E&C backlog declined to $4.6 billion.
Outlook, commentary, risks and unusual items
Management continued pursuing a target of $200 million in annualized savings and reported that $180 million had been identified and actioned. Management cited opportunities in LNG, downstream infrastructure, technology and recurring government services, while noting that low commodity prices were causing oil and gas customers to defer, suspend or terminate capital projects.
The company expects to complete integration of the acquired Chematur businesses in the third quarter of 2016. It also established a 50%-owned joint venture supporting the U.K. Ministry of Defence Military Flying Training Systems program; KBR advanced $14 million for initial working capital.
A reserve for estimated losses on uncompleted contracts was $44 million at March 31, 2016, including $33 million primarily related to a power project expected to be completed in 2017. The company disclosed $7 million of potential liquidated damages that were not considered probable and therefore were not accrued.
Significant contingencies include $401 million of long-term claims and accounts receivable related to the PEMEX/PEP arbitration. Collection remains subject to ongoing U.S. appellate proceedings and other enforcement actions, and timing is uncertain. LogCAP III closeout, government audits, Form 1 disputes and related litigation remain unresolved; the company cannot determine the timing or net amounts to be collected or paid. KBR also faces government investigations and litigation, including matters related to Unaoil, the 2013 financial-statement restatement and False Claims Act allegations.
Management believes existing cash, operating cash flows and available credit facilities are sufficient for operations for at least the next 12 months. Liquidity is subject to working-capital volatility, project losses, pension funding, foreign-exchange movements, customer concentration and the ability to maintain letter-of-credit and surety capacity.
Investor verification checklist
- Verify whether the $401 million PEMEX/PEP receivable is ultimately collected and the timing of any recovery.
- Monitor the $33 million power-project loss reserve and final cash requirements through expected completion in 2017.
- Track E&C backlog, project margins and additional cost-to-complete revisions amid weak hydrocarbons-sector spending.
- Assess the sustainability of the Government Services improvement, including change orders and U.S. government contract exposure.
- Review developments in LogCAP III closeout, DCAA audits, Form 1 disputes, False Claims Act matters and the Unaoil investigation.
- Confirm progress and contribution from the Chematur acquisition and the U.K. military training joint venture.
- Reconcile reported cash with restricted or project-level cash and monitor letter-of-credit utilization and covenant compliance.