KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The request metadata identifies “2016 Q2,” but the filing itself is KBR’s 2017 second-quarter Form 10-Q.
Business Context
KBR provides professional services and technologies across government services, technology and consulting, and engineering and construction. Non-core activities include businesses being exited. The 2017 results include the Wyle and KTS acquisitions completed in the third quarter of 2016, primarily within Government Services.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $1,094 million | $1,009 million | $2,200 million | $2,005 million |
| Gross profit | $108 million | $74 million | $190 million | $142 million |
| Operating income | $103 million | $63 million | $166 million | $128 million |
| Net income attributable to KBR | $77 million | $47 million | $114 million | $89 million |
| Diluted EPS | $0.54 | $0.32 | $0.80 | $0.62 |
| Operating cash flow | Not separately provided | Not separately provided | $210 million | $(12) million |
- Quarterly revenue increased 8%; six-month revenue increased 10%. Gross margin was approximately 9.9% versus 7.3% in the prior-year quarter and 8.6% versus 7.1% for the six-month period. Operating margin was approximately 9.4% versus 6.2% quarterly and 7.5% versus 6.4% year to date.
- Cash and equivalents were $491 million at June 30, 2017, compared with $536 million at December 31, 2016. Cash decreased $45 million during the first six months.
- Cash flow from operations of $210 million was driven substantially by working-capital changes, including collection of the PEMEX settlement receivable and lower contract balances.
- Capital expenditures were $6 million. Financing cash outflows included $180 million of revolving-credit repayments, $52 million of share repurchases and $23 million of dividends.
- Revolving-credit borrowings were $470 million, with $37 million of letters of credit outstanding under the facility. The $1 billion facility matures in September 2020; KBR reported compliance with its financial covenants.
- Nonrecourse project debt totaled $40 million, comprising $9 million current and $31 million noncurrent.
Material Changes Versus the Prior Comparable Period
- Government Services: Second-quarter revenue rose to $543 million from $229 million, primarily from Wyle and KTS and growth in U.S. military support contracts. Six-month revenue increased to $1.058 billion from $439 million.
- Engineering & Construction: Second-quarter revenue declined to $462 million from $621 million, while gross profit increased to $55 million from $35 million. The improvement included $35 million of revenue and gross profit from the PEMEX/PEP arbitration settlement.
- Technology & Consulting: Quarterly revenue declined 16% to $82 million, but gross profit increased to $17 million from $15 million due to project mix and technology-license milestones.
- Non-strategic Business: Revenue declined to $7 million from $61 million as power projects neared completion; the quarterly gross loss narrowed to $1 million from $17 million.
- Equity earnings from unconsolidated affiliates declined to $41 million for the six-month period from $62 million, primarily due to lower progress and increased cost estimates at the Ichthys joint venture.
- The company corrected cumulative accounting errors in the second quarter, increasing equity earnings and KBR-attributable net income by $9 million and $11 million, respectively, for the three and six months ended June 30, 2017. Management concluded the prior financial statements were not materially misstated.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued opportunities in Government Services, supported by defense, training, maintenance and technology-upgrade demand, but notes competitive bidding, procurement delays and potential changes in government spending.
- Hydrocarbons markets remain affected by commodity-price volatility and customer capital-spending reductions. Management sees opportunities in LNG, gas infrastructure, chemicals and fertilizers.
- Backlog was $10.324 billion at June 30, 2017, including $7.891 billion in Government Services, $2.134 billion in Engineering & Construction and $292 million in Technology & Consulting. Approximately 35% was expected to be executed within one year; $125 million related to active loss-position contracts.
- The Ichthys joint venture included $571 million of unapproved change orders, claims and estimated supplier or subcontractor recoveries in project estimates at June 30, 2017, of which $490 million had been recognized on a percentage-of-completion basis. Unresolved matters could materially affect future profit, cash flow and financial position.
- Under an Ichthys settlement mechanism, amounts may have to be refunded if disputes are not resolved by December 31, 2020. KBR and its partners have joint and several liability for applicable refunds. The joint venture also faces recovery risk related to a terminated power-plant subcontractor.
- U.S. government Form 1s questioned $171 million of billed costs; $83 million remained recorded as claims receivable. KBR had accrued a $57 million reserve for unallowable costs and reported uncertainty regarding timing and ultimate resolution.
- KBR received a favorable ASBCA ruling supporting recovery of approximately $45 million plus interest related to private-security costs; no loss provision was recorded because management considered an adverse outcome unlikely.
- Legal, regulatory and investigation matters include LogCAP-related disputes, False Claims Act matters, the Unaoil investigations by the DOJ, SEC and U.K. Serious Fraud Office, and shareholder litigation. Some potential losses cannot yet be estimated.
- Management believes cash, operating cash flow, credit facilities and surety capacity are sufficient for operations for at least the next 12 months. The company intended to seek longer-term financing to replace part of its revolving borrowings.
Most Important Facts for Investors to Verify
- Whether Ichthys claims, change orders, subcontractor recoveries and potential refund obligations are ultimately resolved at recorded amounts.
- The timing and collectability of U.S. government claims receivable, including the $83 million subject to Form 1 objections.
- The sustainability of Government Services growth after the Wyle and KTS acquisition contribution.
- The remaining losses and cash requirements associated with the final non-strategic power project and other loss-position contracts.
- Compliance with the revolving-credit agreement as the leverage covenant tightens to 3.25-to-1 after December 31, 2017.
- The effect of the 2018 adoption of the new revenue-recognition standard, including any impact on contract balances, timing of revenue and disclosures.
- The status and potential financial exposure from DOJ, SEC, SFO and shareholder litigation matters.