KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The request metadata references “2016 Q4,” but the provided filing is KBR’s fiscal 2017 Form 10-K, filed February 23, 2018; it includes comparative 2016 results and quarterly data.
Business context
KBR provides professional services, project delivery and proprietary technologies across government services and hydrocarbons markets. Core segments are Government Services, Technology & Consulting, and Engineering & Construction. Non-strategic operations were substantially complete and are being exited.
Operations span more than 40 countries and serve customers in more than 75 countries. Government Services expanded materially following the 2016 Wyle and HTSI acquisitions, while hydrocarbons activity remained affected by lower customer capital spending and commodity-price volatility.
Financial performance and key metrics
| Fiscal year ended December 31 | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $4.171 billion | $4.268 billion | (2%) |
| Gross profit | $342 million | $112 million | +$230 million |
| Gross margin | 8.2% | 2.6% | +5.6 pts |
| Operating income | $266 million | $28 million | +$238 million |
| Operating margin | 6.4% | 0.7% | +5.7 pts |
| Net income attributable to KBR | $434 million | $(61) million | +$495 million |
| Diluted EPS | $3.06 | $(0.43) | +$3.49 |
| Operating cash flow | $193 million | $61 million | +$132 million |
| Cash and equivalents | $439 million | $536 million | $(97) million |
| Revolving credit debt | $470 million | $650 million | $(180) million |
| Total shareholders’ equity | $1.221 billion | $745 million | +$476 million |
| Backlog | $10.570 billion | $10.938 billion | (3%) |
Reported net income was materially affected by a $223 million release of the U.S. deferred-tax-asset valuation allowance and an $18 million favorable Tax Act impact in the fourth quarter. The reported 2017 income-tax benefit was $193 million, compared with an $84 million provision in 2016. Accordingly, EPS and net margin are not representative of underlying recurring operating performance.
Segment results and changes versus 2016
- Government Services: Revenue increased 61% to $2.193 billion, primarily because Wyle and HTSI contributed a full year of results and existing U.S. government programs grew. Gross profit increased 13% to $155 million. U.S. government revenue reached $1.914 billion, or 46% of consolidated revenue.
- Technology & Consulting: Revenue decreased 6% to $326 million, mainly because of lower proprietary-equipment sales. Gross profit increased 8% to $79 million due to license fees, improved chargeability and lower consulting overhead.
- Engineering & Construction: Revenue declined 31% to $1.614 billion as major projects in Australia, the U.S. and Europe were completed or neared completion. Gross profit improved to $108 million from $7 million, benefiting from the non-recurrence of major 2016 loss provisions and a $35 million favorable PEMEX settlement.
- Non-strategic Business: Revenue declined 82% to $38 million as power projects were completed. The prior-year $105 million gross loss did not recur.
Consolidated revenue declined despite Government Services growth because of reduced activity and project completion in Engineering & Construction and the Non-strategic Business segment. Equity earnings from unconsolidated affiliates decreased 21% to $72 million, largely because of lower progress and higher reimbursable-cost estimates on the Ichthys LNG project.
Cash flow, liquidity and debt
- Operating cash flow was $193 million, supported by $141 million of favorable project working-capital changes, collections on large EPC projects and the PEMEX settlement.
- Investing cash use was $12 million, compared with $981 million in 2016, when KBR spent $911 million on acquisitions and related investments.
- Financing cash use was $290 million, including $180 million of revolving-debt repayment, $53 million of share repurchases and $45 million of dividends.
- Cash totaled $439 million, including $61 million held by consolidated joint ventures that was restricted to project activities. International cash was $194 million and domestic cash was $184 million.
- KBR had a $1 billion unsecured revolving credit facility maturing in September 2020, with $470 million drawn and $37 million of letters of credit outstanding at year-end. The company was in compliance with its financial covenants.
- In February 2018, KBR received a commitment for up to $2.2 billion of senior secured credit facilities, intended for acquisitions, Ichthys funding, refinancing existing revolver borrowings and general corporate purposes. Closing remained subject to conditions.
Guidance, outlook, risks and unusual items
- Management expected continued opportunities in Government Services, supported by defense, space, technical-services and mission-support demand, but noted competitive procurement, protests, delays and changing government budgets.
- Hydrocarbons demand remained dependent on customer capital spending, commodity prices and project financing. KBR emphasized midstream gas, LNG, petrochemical, chemical and fertilizer opportunities and a greater mix of recurring services and reimbursable work.
- KBR expected to provide approximately $300 million to $400 million of additional funding to the Ichthys LNG joint venture over the following 12 months; approximately $47 million had been advanced in February 2018. Recovery claims and change orders remained disputed.
- The Ichthys project included $924 million of unapproved change orders, customer claims and estimated supplier or subcontractor recoveries in project estimates at completion, compared with $294 million at the end of 2016. KBR’s 30% share of the project created exposure to additional costs, refunds and potentially funding obligations above its ownership percentage because of joint-and-several obligations.
- The Ichthys fixed-price power-plant subcontractor abandoned the project. The joint venture submitted a $1.7 billion claim against the consortium, while completion costs and recovery remained uncertain.
- KBR’s frozen defined-benefit pension plans had a $391 million funding deficit at year-end. Expected 2018 pension contributions were $40 million, and U.K. funding requirements could change after the next triennial valuation beginning in April 2018.
- Backlog was $10.570 billion, with 34% expected to be recognized within one year. Approximately 10% was fixed-price, 60% related to private finance initiatives and 30% was cost-reimbursable. Backlog is subject to cancellation, suspension, scope changes and profitability risk.
- Other material risks include U.S. government audits and cost disallowances, customer concentration, percentage-of-completion estimates, fixed-price cost overruns, joint-venture obligations, foreign exchange, political and security conditions, environmental liabilities, litigation and oil-and-gas capital-spending cycles.
- KBR adopted the new revenue-recognition standard on January 1, 2018 and expected an opening retained-earnings reduction of less than $50 million.
Investor verification points
- Reconcile the $434 million of 2017 net income attributable to KBR to recurring operating earnings after excluding the $223 million valuation-allowance release, $18 million Tax Act benefit and other settlements.
- Review the Ichthys LNG project’s current cost-to-complete estimates, disputed claims, funding advances, guarantees and potential exposure beyond KBR’s 30% ownership interest.
- Assess the sustainability of Government Services growth and the concentration represented by the U.S. government’s 46% share of consolidated revenue.
- Verify cash availability after restricting joint-venture cash, pension funding, debt service, dividends and projected Ichthys funding requirements.
- Monitor the proposed $2.2 billion financing, refinancing of the existing revolver and compliance with leverage and net-worth covenants.
- Evaluate the $391 million pension deficit, future U.K. funding requirements and the effect of interest rates, asset performance and actuarial assumptions.
- Review U.S. government claims and Form 1 matters, including $83 million of questioned-cost receivables and the $51 million reserve for potentially disallowable costs.
- Confirm the effect of ASC 606 adoption on revenue timing, contract assets and liabilities, backlog conversion and opening retained earnings.