KBR, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the quarter ended June 30, 2016, although the request metadata identifies “2015 Q2.” KBR is a global engineering, procurement, construction and services company serving hydrocarbons, technology and consulting, and government-services markets. The financial statements are unaudited and presented in millions except per-share data.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $1,009 | $1,381 | $2,005 | $2,817 |
| Gross profit | $74 | $74 | $142 | $144 |
| Operating income | $63 | $96 | $128 | $160 |
| Net income attributable to KBR | $47 | $62 | $89 | $106 |
| Diluted EPS | $0.32 | $0.43 | $0.62 | $0.73 |
| Operating cash flow | Not separately presented | Not separately presented | $(12) | $(139) |
- Second-quarter gross margin was approximately 7.3%, versus 5.4% in the prior-year quarter. Operating margin was approximately 6.2%, versus 7.0%; net margin attributable to KBR was approximately 4.7%, versus 4.5%.
- Six-month gross margin was approximately 7.1%, versus 5.1%. Operating margin was approximately 6.4%, versus 5.7%; net margin attributable to KBR was approximately 4.4%, versus 3.8%.
- Equity earnings from unconsolidated affiliates declined to $33 million in the quarter and $62 million year to date, from $53 million and $88 million, respectively.
- Cash and equivalents were $804 million at June 30, 2016, down from $883 million at December 31, 2015. Total assets were $3.432 billion and shareholders’ equity was $1.145 billion.
- Nonrecourse project debt totaled $50 million, consisting of $9 million current and $41 million noncurrent. KBR had no cash borrowings under its $1 billion unsecured revolving credit facility at June 30, 2016, but had $116 million of letters of credit outstanding.
- The company paid $23 million of dividends during the first six months and declared dividends of $0.08 per share in each quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined 27% in the quarter and 29% year to date, primarily from reduced activity and completion or near-completion of major projects, the 2015 deconsolidation of Industrial Services Americas, and the sale or completion of non-strategic businesses.
- Engineering & Construction revenue fell 35% in the quarter and 36% year to date. E&C gross profit declined to $35 million from $52 million in the quarter and to $64 million from $107 million year to date.
- Government Services improved materially: quarterly revenue rose 45% to $229 million and gross profit increased to $41 million from a $1 million loss. Results benefited from expanded U.S. government contracts and a $33 million settlement for reimbursement of sodium dichromate legal fees.
- Technology & Consulting revenue increased 23% in the quarter and 28% year to date, but gross profit declined because of a less profitable mix weighted toward proprietary equipment rather than consulting and licensing.
- Non-strategic Business revenue declined 68% in the quarter and 66% year to date. The segment recorded a $17 million quarterly gross loss and a $16 million year-to-date gross loss, principally from higher subcontractor costs on a power project.
- General and administrative expense declined 19% in the quarter and 16% year to date, reflecting workforce reductions and other cost savings. Management reported net annualized cost savings of approximately $200 million.
- Backlog declined to $11.032 billion at June 30, 2016 from $12.333 billion at December 31, 2015, primarily due to project workoff and foreign-exchange effects. Approximately 38% of backlog was expected to be executed within one year.
Cash Flow, Liquidity and Outlook
- First-half operating cash use improved to $12 million from $139 million in 2015. Investing cash use was $27 million, including $22 million for technology-business acquisitions. Financing cash use was $38 million.
- Liquidity includes $804 million of cash and equivalents and substantial unused revolving-credit capacity. Management stated that existing cash, internally generated cash flow and available credit were sufficient for at least the next 12 months, subject to normal project and working-capital volatility.
- Letters of credit outstanding totaled $476 million against approximately $2.1 billion of committed and uncommitted lines. Management believed available letter-of-credit and surety capacity was adequate for operations and current backlog for the next 12 months.
- On July 1, 2016, KBR completed its acquisition of Wyle for aggregate consideration of approximately $600 million, including transaction expenses and repayment of Wyle debt. KBR funded $400 million with borrowings under its credit agreement and intended to obtain longer-term financing by year-end 2016.
- Management cited continued opportunities in government services, LNG and selected midstream and downstream hydrocarbons markets, while noting that low commodity prices were causing customers to defer, suspend or terminate capital projects.
Risks, Contingencies and Unusual Items
- E&C recognized $70 million of unfavorable estimate changes year to date, primarily from equipment failure during startup of a U.S. EPC ammonia project. The project was 96% complete and expected to finish by year-end 2016.
- Non-strategic Business recognized $26 million of unfavorable estimate changes year to date on a power project. The project was 84% complete and expected to finish in the first half of 2017. The filing warns that actual costs could differ from current estimates.
- Reserve for estimated losses on uncompleted contracts was $37 million at June 30, 2016, including $26 million related primarily to the power project and $5 million related primarily to the ammonia project. Both projects were expected to require future cash expenditures in excess of customer receipts.
- KBR reported $532 million of long-term claims and accounts receivable, including $400 million related to the PEMEX/PEP EPC 1 arbitration and $132 million of government-services claims.
- Collection of the PEMEX/PEP award remains uncertain and subject to U.S., Mexican and other proceedings. KBR had recorded $400 million as a long-term receivable; PEP had posted $465 million of cash collateral in the United States.
- U.S. government Form 1 disputes involved $83 million of questioned costs included in claims and accounts receivable. The company had accrued a $48 million reserve for unallowable costs and could not predict the timing or ultimate resolution of various LogCAP matters.
- Other legal and regulatory matters include False Claims Act and qui tam litigation, shareholder litigation related to the 2013 restatement, and ongoing DOJ and SEC investigations concerning Unaoil-related activities. Several matters were assessed as remote-loss matters, but outcomes and timing remain uncertain.
- Brexit created foreign-exchange and operating risks, particularly for U.K. government-services activities. KBR also remains exposed to commodity prices, project execution, subcontractor performance, customer concentration, foreign exchange, pension obligations and goodwill impairment.
Facts Investors Should Verify
- Confirm that the intended reporting period is June 30, 2016 rather than the “2015 Q2” metadata.
- Assess the sustainability of improved Government Services profitability after the $33 million legal-fee settlement and other favorable estimate changes.
- Review cost-to-complete assumptions and future cash requirements for the ammonia and power projects.
- Track collection, litigation and enforcement outcomes related to the $400 million PEMEX/PEP receivable and U.S. government claims.
- Evaluate post-quarter-end leverage and interest expense following the $400 million Wyle acquisition borrowing.
- Reconcile backlog reductions, foreign-exchange effects and the portion expected to convert into consolidated revenue versus joint-venture earnings.