KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. The request metadata identifies “2021 Q1,” but the filing is for 2022 Q1.
Business Context
KBR provides government solutions and sustainable technology solutions to defense, intelligence, space, aviation, energy, industrial and other customers. Government Solutions represented approximately 85% of first-quarter 2022 revenue, while Sustainable Technology Solutions represented approximately 15%.
The quarter included revenue from the October 2021 Frazer-Nash acquisition and $269 million from Operation Allies Welcome, a largely non-recurring U.S. government humanitarian-support program that was substantially completed during the quarter.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1.714 billion | $1.461 billion | Up 17% |
| Gross profit | $196 million | $168 million | Up 17% |
| Gross margin | 11.4% | 11.5% | Approximately flat |
| Operating income (loss) | $(31) million | $89 million | Down $120 million |
| Operating margin | (1.8)% | 6.1% | Down 7.9 percentage points |
| Net income (loss) attributable to KBR | $(71) million | $49 million | Down $120 million |
| Diluted earnings (loss) per share | $(0.51) | $0.33 | Down $0.84 |
| Cash flow from operations | $89 million | $50 million | Up $39 million |
The principal driver of the quarterly loss was a $137 million non-cash charge recorded in equity losses from unconsolidated affiliates related to the Ichthys LNG Combined Cycle Power Plant subcontractor settlement. KBR also recorded a $12 million unfavorable gross-profit impact and $4 million of severance and asset-impairment costs related to exiting commercial projects in Russia.
Segment Performance
| Segment | Q1 2022 Revenue | Year-over-year change | Q1 2022 Gross Profit |
|---|---|---|---|
| Government Solutions | $1.459 billion | Up 25% | $159 million |
| Sustainable Technology Solutions | $255 million | Down 14% | $37 million |
Government Solutions benefited from organic growth, Operation Allies Welcome and Frazer-Nash. Sustainable Technology Solutions was pressured by project timing, completion of projects being strategically exited, Russia-related impacts and the Ichthys-related equity loss.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $412 million at March 31, 2022, versus $370 million at December 31, 2021. Approximately $122 million was held by consolidated joint ventures and Aspire Defence entities and was restricted to project activities or distributions requiring approval.
- Operating cash flow was $89 million, aided by a $370 million accounts-receivable working-capital benefit, partly offset by a $400 million accounts-payable outflow.
- Investing activities provided $12 million, including $18 million of proceeds from the sale of two U.K. roads investments, partially offset by $6 million of capital expenditures.
- Financing activities used $52 million, including $15 million of dividends, $33 million of share repurchases and employee share withholdings, and debt repayments.
- Total debt was $1.886 billion, including $1.870 billion of long-term debt net of current maturities. Debt included $438 million of Term Loan A, $510 million of Term Loan B, $350 million of convertible notes, $250 million of senior notes and $362 million drawn under the Senior Credit Facility.
- The company had approximately $895 million of remaining capacity across committed and uncommitted lines supporting letters of credit. KBR was in compliance with its debt covenants at March 31, 2022 and stated that available cash, operating cash flow and credit capacity were sufficient for the next 12 months.
- Interest-rate exposure remained material: after swaps, KBR reported $1.1 billion of fixed-rate debt and $810 million of variable-rate debt. A 50-basis-point rate increase was estimated to increase pre-tax interest expense by approximately $4 million over the next 12 months.
Material Changes and Outlook
- Total backlog was $13.984 billion at March 31, 2022, down from $14.973 billion at December 31, 2021. Government Solutions backlog declined to $11.572 billion from $12.628 billion, while Sustainable Technology Solutions backlog increased to $2.412 billion from $2.345 billion.
- Remaining performance obligations were $10.9 billion; management expected approximately 33% to be recognized within one year, 33% in years two through five and 34% thereafter.
- KBR expects continued opportunities from defense modernization, space, cyber, artificial intelligence, energy transition, decarbonization, hydrogen, green ammonia and circular-economy technologies.
- The $20 billion HomeSafe household-goods contract award remained subject to protests at the Court of Federal Claims, and transition was on hold.
- In April 2022, the Ichthys subcontractor settlement provided for approximately $271 million of cash to KBR’s joint venture share: $203 million was received in April 2022 and approximately $68 million was expected in March 2023. Under the credit agreement, settlement proceeds are subject to mandatory Term Loan A prepayment provisions.
- KBR announced its intent to exit commercial projects in Russia. Management did not expect the exit itself to have a material adverse effect, but identified sanctions, supply-chain disruption, inflation, fixed-price cost exposure, foreign-exchange volatility and geopolitical instability as risks.
- Management estimated a 25% 2022 effective tax rate excluding discrete items. The reported first-quarter effective tax rate was approximately negative 37%, primarily because the Ichthys-related equity adjustment did not generate a corresponding KBR tax benefit.
Risks, Contingencies and Unusual Items
- KBR had $86 million accrued for probable and reasonably estimable unallowable costs associated with open U.S. government matters.
- Legacy U.S. government contract closeout matters, including LogCAP III claims, False Claims Act proceedings and subcontractor disputes, remain unresolved. Certain potential losses cannot be reasonably estimated; other matters have accrued probable losses.
- The North West Rail Link project involved claims of up to approximately A$301 million. KBR had accrued an immaterial probable and estimable loss and expected project-specific insurance to cover eligible claims subject to deductibles.
- KBR maintained a $64 million U.K. pension funding deficit and contributed approximately $11 million to pension plans during the quarter. The existing U.K. funding agreement required annual contributions of approximately £33 million until new requirements were finalized.
- The company adopted ASU 2020-06 using the full retrospective method, recombining the convertible notes’ liability and equity components. The adoption increased reported long-term debt and affected comparative earnings-per-share presentation but did not materially affect cash flow.
Facts Investors Should Verify
- Whether the non-cash Ichthys charge and the related settlement proceeds produce the expected improvement in subsequent earnings and cash flow.
- The timing and application of the approximately $68 million remaining Ichthys settlement payment and any required Term Loan A prepayment.
- The sustainability of Government Solutions growth after the substantial completion of Operation Allies Welcome.
- Progress on HomeSafe contract protests and transition timing.
- Changes in backlog, funded backlog and remaining performance obligations, particularly after the $989 million sequential backlog decline.
- Exposure to Russia-related sanctions, project-exit costs, inflation, supply-chain disruption and fixed-price contract losses.
- Developments in LogCAP III, False Claims Act, Chadian, North West Rail Link and other legal or government matters.
- Debt maturities, refinancing needs for the $350 million convertible notes due November 2023, covenant compliance and variable-rate exposure.