KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. The supplied metadata states “2019 Q1,” but the filing is the 2020 first-quarter Form 10-Q, filed May 1, 2020. Results are compared with the three months ended March 31, 2019.
Business Context
KBR operates through Government Solutions, Technology Solutions and Energy Solutions, plus non-strategic activities. Government Solutions serves U.S., U.K. and Australian government customers; Technology Solutions provides process technologies and equipment; and Energy Solutions provides engineering, procurement, construction and related services to hydrocarbons customers. COVID-19, the collapse in oil prices and the resulting energy-market disruption materially affected the quarter.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.537 billion | $1.340 billion | +15% |
| Gross profit | $186 million | $153 million | +22% |
| Gross margin | 12.1% | 11.4% | +70 bps |
| Operating income (loss) | $(69) million | $78 million | $(147) million |
| Net income (loss) attributable to KBR | $(104) million | $40 million | $(144) million |
| Diluted EPS | $(0.73) | $0.28 | $(1.01) |
| Cash flow from operations | $41 million | $48 million | $(7) million |
Revenue growth was driven primarily by Energy Solutions, whose revenue increased 81% to $491 million, while Government Solutions revenue declined 2% to $955 million and Technology Solutions revenue declined 4% to $88 million. Government Solutions gross profit rose 41% to $127 million; Energy Solutions gross profit declined 6% to $34 million due mainly to lower-margin project mix.
Reported operating results included $62 million of goodwill impairment and $116 million of restructuring and asset-impairment charges. The latter included approximately $47 million of restructuring charges, $35 million of leased-facility and related asset impairments, $11 million of trade-name impairments and $18 million of equity-method investment impairments. A $19 million gain on disposition of assets and investments partly offset these charges.
Cash and equivalents were $566 million at March 31, 2020, compared with $712 million at December 31, 2019. Accounts receivable increased to $1.085 billion from $938 million. Total assets were $5.104 billion and total shareholders’ equity was $1.658 billion.
Long-term debt, net of current maturities, was $1.053 billion at March 31, 2020, compared with $1.183 billion at year-end 2019. KBR had no borrowings under its $500 million revolving credit facility, was in compliance with its debt covenants and reported approximately $1.0 billion of remaining capacity across committed and uncommitted letter-of-credit lines. The amended credit facility extends the Revolver, PLOC and Term Loan A maturities to February 2025 and Term Loan B maturity to February 2027.
Financing cash outflow was $155 million, primarily reflecting $139 million of net debt repayments related to refinancing and $11 million of dividends. The quarterly dividend was increased to $0.10 per share from $0.08 in the prior-year period and was paid April 15, 2020.
Material Changes Versus Prior Comparable Period
- Revenue increased $197 million, primarily from Energy Solutions awards and project ramp-up.
- Gross profit increased $33 million, but the company moved from $78 million of operating income to a $69 million operating loss because of impairment and restructuring charges.
- KBR moved from $40 million of attributable net income to a $104 million attributable net loss.
- Operating cash flow decreased modestly to $41 million, with a $169 million working-capital use from increased receivables partly offset by a $125 million increase in accounts payable.
- Cash declined $146 million during the quarter, compared with a $31 million decline in the prior-year quarter.
- Backlog declined to $13.922 billion from $14.636 billion at December 31, 2019; Energy Solutions backlog declined to $2.677 billion from $3.097 billion.
- Remaining performance obligations were $11.0 billion, with approximately 33% expected to be recognized within one year.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific quantitative full-year earnings or revenue outlook in the supplied filing. Management stated that existing cash, operating cash flows, credit availability and other lines of credit should be sufficient for the next 12 months and currently had no plans to draw the Revolver for operating purposes.
More than 90% of office personnel were working remotely, and management expected to reduce its real-estate footprint. Government Solutions remained supported by long-term, mission-critical contracts, while hydrocarbons activity was exposed to lower oil prices, reduced customer capital spending, project delays and potential contract reductions.
The Ichthys LNG project remains a significant contingency. KBR’s 30%-owned JKC joint venture had approximately $872 million of unapproved change orders and claims included in project estimates at March 31, 2020. JKC claims approximately $1.8 billion against the former power-plant subcontractor, has contributed approximately $484 million to the project on an inception-to-date basis and had $164 million of related performance and warranty letters of credit outstanding. Unfavorable dispute outcomes could require additional funding and materially affect earnings, financial position and cash flow.
Other exposures include a $249 million pension obligation, U.S. government contract disputes and audits, False Claims Act and related litigation, the Unaoil investigation, and a North West Rail Link claim of up to approximately A$300 million against a joint venture in which KBR has a 33% interest. The filing states that some matters are not probable of material loss or are adequately reserved, but outcomes remain uncertain.
KBR adopted the current expected credit-loss standard on January 1, 2020, recording a $3 million after-tax reduction to opening retained earnings. COVID-19 and oil-market effects could result in additional impairments, restructuring costs, project delays, credit losses or reduced demand in future periods.
Investor Verification Points
- Verify the impact of COVID-19, oil-price volatility and customer capital-spending reductions on Energy Solutions backlog, margins and new awards.
- Assess whether the $62 million goodwill impairment and $116 million restructuring and asset-impairment charges are substantially nonrecurring or indicate further impairment risk.
- Monitor Ichthys LNG arbitrations, the approximately $1.8 billion subcontractor claim, the December 31, 2020 Funding Deed deadline and potential additional JKC funding.
- Review cash conversion, receivables growth and the availability of cash held by international and joint-venture entities.
- Check compliance with the amended credit facility’s leverage and interest-coverage covenants as operating conditions evolve.
- Evaluate pension funding requirements, including the stated minimum annual U.K. contribution of approximately £33 million.
- Track U.S. government disputes, Form 1 questioned costs of $78 million, related reserves and other legal or regulatory matters.
- Confirm whether the $13.922 billion backlog and $11.0 billion of remaining performance obligations convert into revenue as scheduled and whether fixed-price project risks increase.