KBR, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. The request metadata references “2022 Q1,” but the provided filing is KBR’s first-quarter 2023 Form 10-Q, filed May 1, 2023.
Business Context
KBR provides science, technology, engineering, logistics, defense, space, government-support, and sustainable technology services. Operations are organized into Government Solutions, Sustainable Technology Solutions, and Other corporate activities. The company reported $11.3 billion of remaining performance obligations and $16.5 billion of backlog at March 31, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1.703 billion | $1.714 billion | Down 1% |
| Gross profit | $245 million | $196 million | Up 25% |
| Gross margin | 14.4% | 11.4% | Up approximately 300 bps |
| Operating income (loss) | $144 million | $(31) million | Improved $175 million |
| Operating margin | 8.5% | (1.8)% | Improved approximately 1,030 bps |
| Net income (loss) attributable to KBR | $86 million | $(71) million | Improved $157 million |
| Diluted EPS | $0.56 | $(0.51) | Improved $1.07 |
| Operating cash flow | $35 million | $89 million | Down $54 million |
| Capital expenditures | $19 million | $6 million | Up $13 million |
| Cash and cash equivalents | $416 million | $389 million at Dec. 31, 2022 | Up $27 million |
Interest expense increased to $26 million from $20 million, primarily because of higher U.S. interest rates. The effective tax rate was 26%, compared with (37)% in the prior-year quarter; the prior-year rate was distorted by the nondeductible Ichthys LNG settlement loss.
Segment Performance and Material Changes
- Government Solutions: Revenue declined 9% to $1.328 billion and operating income declined 12% to $102 million. The principal headwind was the $269 million of Q1 2022 revenue from Operation Allies Welcome contingency work, which had substantially wound down by early 2022. Aspire construction activity also declined, partly offset by increased European Command exercises, training, and related activity.
- Sustainable Technology Solutions: Revenue increased 47% to $375 million and operating income improved to $82 million from a $106 million loss. The improvement reflected higher technology sales and engineering services, favorable licensing mix, and the absence of the $137 million noncash Ichthys LNG settlement charge recorded in Q1 2022.
- Equity-method earnings: Equity in earnings of unconsolidated affiliates was $23 million, compared with a $118 million loss in Q1 2022, primarily because the Ichthys-related charge did not recur.
- Backlog: Total backlog rose to $16.518 billion from $15.555 billion at year-end 2022. The increase included approximately $0.8 billion related to the Plaquemines LNG project after KZJV received full notice to proceed for Phase 2.
- Share repurchases and dividends: KBR repurchased $50 million of stock under its authorization and withheld $11 million of shares for employee tax obligations. The company declared a quarterly dividend of $0.135 per share, up from $0.120 in Q1 2022. Approximately $401 million remained available under the $500 million repurchase authorization.
Liquidity, Debt, and Capital Resources
- Total debt was $1.741 billion, including $367 million classified as current debt. The $350 million of 2.50% convertible notes mature November 1, 2023.
- Term Loan A and the revolving facility mature in November 2026; Term Loan B matures in February 2027; and $250 million of senior notes mature in September 2028.
- KBR reported compliance with its debt covenants as of March 31, 2023. The company stated that cash balances, operating cash flow, credit availability, and other credit lines should be sufficient for the next 12 months.
- The company had $1.0 billion of committed revolving capacity and $369 million of bilateral and uncommitted credit lines supporting letters of credit. Approximately $844 million of combined capacity remained available.
- Cash flow from operations was reduced by working-capital investment, including a $130 million increase in accounts receivable. KBR also sold or derecognized $703 million of receivables under monetization programs during the quarter.
- Cash balances included $114 million held by consolidated joint ventures and Aspire Defence entities that was restricted to project activities and not generally available for corporate purposes.
Outlook, Risks, and Unusual Items
- Management expects continued demand from defense modernization, space, cybersecurity, energy transition, decarbonization, hydrogen, ammonia, circular economy, and other sustainable technology markets.
- Government funding remains subject to potential U.S. debt-ceiling disputes, continuing resolutions, appropriations delays, and possible government shutdowns. The effects on individual programs cannot be predicted.
- KBR continues winding down operations in Russia following sanctions related to the Russia-Ukraine conflict. Q1 2022 included $12 million of unfavorable project estimate changes and $4 million of severance and asset-impairment costs related to the exit.
- Project profitability is sensitive to labor, materials, equipment, productivity, weather, contract estimates, claims, change orders, and legacy legal matters. Unapproved change orders and claims included in project estimates increased to $61 million at March 31, 2023 from $48 million at January 1, 2023.
- Government-contract audits, LogCAP III closeout matters, False Claims Act litigation, and other legal proceedings remain contingencies. KBR accrued $51 million for probable and reasonably estimable unallowable costs related to open government matters. The company could not estimate a reasonably possible loss range for certain matters, including the Howard qui tam litigation and the FKTC dispute, and recorded no accrual for those matters.
- KBR has ongoing exposure to the Ichthys LNG project, including potential claims involving paint and insulation defects. The related joint venture maintains a provision for contingent liability, but the ultimate recovery and obligation remain uncertain.
- The U.K. pension plan requires minimum annual contributions of approximately £33 million through March 2028, subject to future actuarial reviews and plan performance.
- Interest-rate and foreign-currency risks remain material. After hedging, KBR reported $1.6 billion of fixed-rate debt and $166 million of variable-rate debt; a 50-basis-point rate increase was estimated to raise next-12-month pretax interest expense by approximately $1 million.
Investor Verification Priorities
- Verify the treatment and cash funding plan for the $350 million convertible notes maturing in November 2023, including the effect of the note hedge and warrant transactions.
- Assess whether lower Government Solutions revenue and the expiration of Operation Allies Welcome work are being offset by European activity, backlog conversion, and new awards.
- Review the sustainability of the Q1 margin improvement, particularly the absence of the Ichthys charge, favorable licensing mix, and legacy-matter resolutions.
- Monitor operating cash conversion, receivables growth, and continued reliance on receivable monetization programs.
- Track U.S. government appropriations, debt-ceiling developments, continuing resolutions, and their potential impact on contract funding.
- Follow Ichthys claims, LogCAP III closeout matters, government audits, FKTC litigation, and the Howard qui tam case.
- Reconcile reported backlog with ASC 606 remaining performance obligations, noting that backlog includes amounts related to unconsolidated joint ventures that are not recognized directly as KBR revenue.