KBR, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2020, compared with the corresponding 2019 periods. The provided metadata states “2019 Q3,” but the filing itself is the 2020 third-quarter Form 10-Q, filed October 30, 2020.
Business context
KBR provides professional services, technologies and lifecycle solutions across Government Solutions, Technology Solutions and Energy Solutions. Government Solutions serves U.S., U.K. and Australian government and defense customers; Technology Solutions focuses on proprietary process technologies and related services; and Energy Solutions serves energy and industrial markets. Management is transitioning toward a two-core-segment model centered on Government Solutions and Technology Solutions, while reducing exposure to lump-sum EPC and commoditized construction work.
Financial performance and liquidity
| Metric | Three months ended Sept. 30 | Change | Nine months ended Sept. 30 | Change |
|---|---|---|---|---|
| Revenue | $1,379 million | Down 3% | $4,301 million | Up 3% |
| Gross profit | $172 million | Up 2% | $500 million | Up 4% |
| Operating income | $93 million | Down from $104 million | $12 million | Down from $274 million |
| Net income attributable to KBR | $52 million | Down from $56 million | $(91) million | Down from $144 million |
| Diluted EPS | $0.36 | Down from $0.39 | $(0.64) | Down from $1.01 |
| Operating cash flow | Not provided for the quarter | — | $245 million | Up from $199 million |
Third-quarter gross margin was approximately 12.5%, operating margin 6.7% and net margin attributable to KBR 3.8%. Nine-month gross margin was approximately 11.6%, operating margin 0.3% and net margin attributable to KBR negative 2.1%.
- Government Solutions revenue was $980 million in the quarter, essentially flat year over year, while gross profit increased 17% to $129 million. Nine-month revenue declined 4% to $2.86 billion, but gross profit increased 19% to $370 million.
- Technology Solutions revenue declined 26% in the quarter to $71 million and 17% year to date to $232 million, while gross profit remained relatively stable at $30 million and $82 million, respectively.
- Energy Solutions revenue declined 7% in the quarter to $327 million and increased 31% year to date to $1.205 billion. Energy gross profit declined 29% in the quarter and 32% year to date, reflecting unfavorable project mix and weaker market conditions.
- Nine-month results included $99 million of goodwill impairment and $176 million of restructuring and asset impairment charges, primarily related to Energy Solutions. These charges drove the year-to-date operating loss and net loss.
- Cash and equivalents were $949 million at September 30, 2020, up from $712 million at December 31, 2019. Cash included $566 million of domestic cash, $199 million of international cash and $184 million held by joint ventures and the Aspire Defence project, which was not readily available for general corporate purposes.
- Investing cash outflow was $38 million, compared with $148 million in 2019, while financing cash flow was positive $41 million, compared with negative $97 million in 2019.
- Total debt was $1.326 billion at September 30, 2020, compared with $1.210 billion at year-end 2019. Long-term debt, net of current maturities, was $1.314 billion. KBR was in compliance with its debt covenants.
- The Senior Credit Facility had aggregate capacity of $1.795 billion, including a $1 billion revolver. KBR had no revolver borrowings and $795 million of term-loan borrowings at September 30, 2020. Credit facilities supporting letters of credit had approximately $1.1 billion of remaining capacity.
- KBR issued $250 million of 4.750% Senior Notes due 2028 on September 30, 2020. On October 1, 2020, it borrowed $260 million under the revolver to help fund the Centauri acquisition.
- The company paid $40 million of dividends during the first nine months and declared quarterly dividends of $0.10 per share, up from $0.08 in the 2019 comparable quarter.
Material changes versus the prior comparable period
- Revenue growth for the first nine months was driven primarily by Energy Solutions project ramp-up in the U.S. Gulf Coast and Mexico, partly offset by lower Government Solutions volume and lower Technology Solutions deliveries.
- Government Solutions profitability improved substantially, aided by favorable project estimate changes, better Aspire Defence performance and ramp-up of LogCAP V Northern Command work.
- Energy Solutions profitability deteriorated despite higher year-to-date revenue. Management discontinued or exited certain higher-risk work, principally lump-sum EPC and commoditized construction services.
- SG&A increased to $89 million in the quarter and $259 million year to date, compared with $74 million and $242 million, respectively, in 2019.
- Interest expense declined to $18 million in the quarter and $60 million year to date, primarily because of lower borrowing levels and the February 2020 refinancing.
- Total backlog declined to $12.795 billion from $14.636 billion at year-end 2019. Energy Solutions backlog fell to $1.345 billion from $3.097 billion, including approximately $1.2 billion removed following decisions to discontinue certain projects.
- Remaining performance obligations under ASC 606 were $9.9 billion, with approximately 32% expected to be recognized within one year, 33% in years two through five and 35% thereafter.
Guidance, outlook, risks and unusual items
- Management stated that existing cash, operating cash flow, credit availability and other lines of credit were sufficient to support operations for the next 12 months. No specific earnings or revenue guidance was provided.
- KBR expects restructuring activities to be substantially completed in 2020, although additional activities may be identified. Integration costs related to the Centauri acquisition are expected over the following 12 months.
- On October 1, 2020, KBR acquired Centauri for approximately $827 million in cash. Centauri expands the company’s space, intelligence, cyber and national-security capabilities; purchase accounting remained incomplete at the filing date.
- COVID-19, lower oil and gas prices, supply-chain disruption, workforce restrictions, contract delays and reduced customer capital spending remain significant risks. Government budget delays, changing defense priorities and the 2020 elections could affect awards and funding.
- The Ichthys LNG joint venture remains subject to extensive claims and arbitrations. KBR’s proportionate share of unapproved change orders and claims was $976 million, including $159 million associated with the Funding Deed. KBR had contributed approximately $484 million to JKC on an inception-to-date basis and had $164 million of related performance and warranty letters of credit outstanding.
- JKC’s claims against the Consortium related to the power plant were approximately $1.8 billion. Arbitration hearings were scheduled for April and August 2021, subject to potential COVID-19 delays. An unfavorable outcome or inability of counterparties to pay could require additional KBR funding and materially affect results.
- KBR reported a $223 million pension obligation at September 30, 2020 and expected 2020 pension contributions of approximately $48 million, of which $33 million had been contributed by quarter-end.
- Other contingencies include U.S. government contract audits and litigation, a False Claims Act matter, the North West Rail Link dispute involving claims of approximately A$301 million, and an appeal involving a Chadian employee class action. Management stated that no material loss was currently considered probable for the latter matter.
Most important facts for investors to verify
- Reconcile the reported year-to-date loss with the $275 million combined goodwill, restructuring and asset impairment charges.
- Assess post-quarter-end leverage and liquidity after the $827 million Centauri acquisition, the $260 million revolver borrowing and receivables sales used to fund the transaction.
- Monitor Energy Solutions backlog, margin recovery and the financial impact of exiting lump-sum EPC and commoditized construction work.
- Track Ichthys LNG arbitration outcomes, potential Funding Deed repayment obligations, letters of credit and additional capital calls.
- Review the sustainability of operating cash flow given the reduction in contract liabilities and the company’s significant project working-capital requirements.
- Evaluate exposure to government funding changes, contract audits, False Claims Act proceedings, joint-and-several guarantees and COVID-19-related operational disruptions.