KBR, INC. annual report, FY2020

KBR, Inc. 2020 Form 10-K Summary

Reporting-period note: The supplied filing is KBR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed February 25, 2021. It does not represent 2019 Q4; 2019 results are provided as the prior comparable period.

Business Context

KBR provides scientific, technology and engineering solutions to government and commercial customers worldwide. Core activities include government defense, intelligence, space, science and logistics services; sustainability-focused process technologies; digital solutions; energy-transition advisory services; and energy-sector engineering and construction.

Government Solutions generated $3.934 billion of 2020 revenue and represented the largest business segment.
Technology Solutions generated $303 million of revenue, including proprietary technologies, equipment, catalysts and digital solutions.
Energy Solutions generated $1.526 billion of revenue but experienced lower margins and impairment activity amid the energy-market downturn.
The U.S. government accounted for $3.079 billion, or 53%, of consolidated revenue; the U.K. government accounted for $573 million, or 10%.
KBR acquired Centauri on October 1, 2020 for approximately $830 million in cash, expanding its space, intelligence, cyber and national-security capabilities.
Management initiated a transition to a two-core-segment model for 2021: Government Solutions and Sustainable Technology Solutions.

Financial Performance and Key Metrics

Metric	2020	2019	Change
Revenue	$5.767 billion	$5.639 billion	Up 2%
Gross profit	$666 million	$653 million	Up 2%
Gross margin	11.6%	11.6%	Approximately flat
Operating income	$57 million	$362 million	Down 84%
Operating margin	1.0%	6.4%	Down approximately 5.4 points
Net income attributable to KBR	$(72) million	$202 million	Declined to a loss
Diluted EPS	$(0.51)	$1.41	Declined
Cash flow from operations	$367 million	$256 million	Up $111 million
Capital expenditures	$20 million	$20 million	Flat
Backlog	$15.115 billion	$14.636 billion	Up 3%

Reported earnings were materially affected by $99 million of goodwill impairment and $214 million of restructuring charges and asset impairments. The company also recorded $30 million of equity earnings from unconsolidated affiliates, compared with $35 million in 2019, and interest expense of $83 million, down from $99 million.

Segment and Margin Developments

Government Solutions: Revenue was essentially flat at $3.934 billion, while gross profit increased 12% to $483 million. Growth in space, defense, sustaining programs, Australia and Centauri offset the nonrecurrence of 2019 disaster-recovery revenue and lower Middle East activity.
Technology Solutions: Revenue decreased 19% to $303 million and gross profit decreased 11% to $105 million, primarily because COVID-19 disrupted proprietary equipment sales and licensing activity.
Energy Solutions: Revenue increased 14% to $1.526 billion, but gross profit declined 14% to $86 million due to a lower-margin project mix, reduced energy-market demand and portfolio-shaping decisions.
Backlog increased to $15.1 billion. Government Solutions backlog rose to $12.5 billion, while Energy Solutions backlog declined to $1.9 billion from $3.1 billion, primarily because management discontinued pursuing certain projects.

Cash Flow, Liquidity and Capital Structure

Operating cash flow was $367 million, supported in part by a $127 million favorable accounts-receivable impact, including receivables factoring and collections.
Cash used in investing activities was $877 million, primarily reflecting the Centauri acquisition and other acquisitions and investments.
Cash provided by financing activities was $225 million, including $250 million of Senior Notes issued in connection with the Centauri acquisition and $260 million borrowed under the Senior Credit Facility.
Cash and equivalents declined to $436 million from $712 million. Approximately $151 million was held by consolidated joint ventures and the Aspire Defence project and was restricted to project purposes.
Total long-term debt, net of current maturities, was $1.584 billion at December 31, 2020, compared with $1.183 billion at December 31, 2019. Total debt obligations, including current maturities, were approximately $1.661 billion.
The Senior Credit Facility had aggregate capacity of $1.795 billion, including a $1 billion revolving facility, with maturities extending to 2025 for the revolver and Term Loan A and 2027 for Term Loan B.
KBR was in compliance with its financial covenants at year-end. Management stated that existing cash, operating cash flow and available credit were sufficient for the next 12 months.
The company sold $779 million of receivables during 2020 and had $112 million of sold receivables outstanding at year-end.
KBR paid $54 million of dividends and repurchased $47 million of common stock during 2020. The annual dividend declared was $0.40 per share, and $303 million remained available under the repurchase authorization.

Material Changes Versus 2019

Revenue increased modestly, but operating income fell sharply because of impairment and restructuring charges and the absence of certain favorable prior-year items.
KBR reported a net loss attributable to shareholders, compared with net income of $202 million in 2019.
Centauri added approximately $125 million of revenue and $19 million of gross profit in the fourth quarter and increased goodwill by approximately $576 million.
Energy Solutions was strategically reduced, including exits from certain lump-sum EPC and commoditized construction activities.
Backlog composition shifted toward Government Solutions and away from Energy Solutions.
Debt increased substantially to fund the Centauri acquisition, although lower interest rates and refinancing reduced reported interest expense.
The defined benefit pension deficit increased to approximately $381 million from $277 million, with $46 million contributed to pension plans in 2020.

Guidance, Outlook and Management Commentary

Management expects continued opportunities in defense modernization, space, cybersecurity, artificial intelligence, health and human performance, energy transition, hydrogen, green ammonia and plastics circular-economy technologies.
The company expects to begin reporting under the revised two-core-segment structure in fiscal 2021.
Management expects restructuring activities to be substantially completed in 2021. Certain software and lease-related obligations extend through 2023 and 2030, respectively.
Approximately 28% of year-end backlog was expected to be executed within one year; 87% of that amount was expected to be recognized as consolidated revenue and 13% through unconsolidated joint ventures.
KBR anticipated continuing quarterly dividends during 2021, subject to Board approval and liquidity, earnings and capital-allocation considerations.

Material Risks, Contingencies and Unusual Items

Ichthys LNG project: KBR’s 30%-owned JKC joint venture had approximately $1.8 billion of claims against the project consortium, while KBR’s share of Funding Deed amounts included in estimates was $157 million. The client demanded repayment in January 2021, and KBR had $164 million of related letters of credit outstanding. Adverse outcomes could require additional funding and materially affect cash flow and earnings.
Revenue estimates: Approximately $1.048 billion of unapproved change orders, client claims and estimated supplier or subcontractor recoveries were included in project estimates at completion. These estimates are subject to dispute and could be revised.
Government contracts: U.S. government audits, cost disallowances, False Claims Act matters, contract termination rights, funding delays and recompete risk could affect revenue, cash flow and profitability.
COVID-19 and energy markets: The pandemic caused operational disruptions, lower commercial activity, supply-chain risks and reduced energy-sector demand. Future effects remained uncertain.
Pensions: KBR expected approximately $48 million of pension contributions in 2021. The U.K. plan’s minimum annual contribution was approximately £33 million, or $45 million at then-current exchange rates, pending the next valuation.
Legal matters: The filing describes unresolved litigation and claims involving the Ichthys project, U.S. government contracts, a Chadian employee class action and the North West Rail Link project. The filing text does not provide a clear maximum aggregate exposure for these matters.
Accounting estimates: Cost-to-cost revenue recognition, disputed claims, goodwill valuation, pension assumptions, tax recoverability and contingent liabilities involve significant management judgment and could produce future reversals or charges.
Customer concentration: Government customers accounted for 63% of consolidated revenue in 2020, increasing exposure to government budgets, appropriations, contract awards and policy changes.

Investor Verification Checklist

Verify that the intended period is fiscal 2020 rather than 2019 Q4, because the supplied filing is a 2020 Form 10-K.
Assess whether the $99 million goodwill impairment and $214 million restructuring and asset-impairment charges are nonrecurring or indicate continuing Energy Solutions weakness.
Review Centauri’s post-acquisition revenue, margins, integration progress, goodwill and customer-relationship valuation assumptions.
Monitor the Ichthys LNG arbitrations, Funding Deed repayment demand, claims recoveries, letters of credit and additional JKC funding requirements.
Reconcile backlog conversion expectations with funded backlog, contract cancellations, fixed-price exposure and the $107 million of active contracts already in a loss position.
Evaluate liquidity after considering $436 million of cash, restricted joint-venture cash, approximately $1.661 billion of debt, pension funding and potential contingent obligations.
Review the sustainability of dividends and share repurchases relative to operating cash flow, acquisition spending and debt reduction needs.
Review U.S. government audits, LogCAP III close-out matters, accrued reserves and pending False Claims Act litigation.