KBR, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The request metadata references “2018 Q4,” but the supplied filing is KBR’s fiscal 2019 Form 10-K, filed February 24, 2020.
Business Context
KBR provides professional services, project delivery, technologies, logistics, engineering, operations and maintenance across government services and hydrocarbons markets. Core segments are Government Solutions, Technology Solutions and Energy Solutions; Non-strategic Business is being exited. KBR had approximately 28,000 employees and $14.6 billion of backlog at year-end.
- Government Solutions serves U.S., U.K. and Australian defense, space and other government agencies.
- Technology Solutions provides proprietary process technologies, equipment, catalysts and related services.
- Energy Solutions provides hydrocarbons consulting, services, engineering, procurement and construction.
- U.S. government revenue was $3.0 billion, or 53% of consolidated revenue; U.K. government revenue was $659 million, or 12%.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $5.639 billion | $4.913 billion | +15% |
| Gross profit | $653 million | $584 million | +12% |
| Operating income | $362 million | $468 million | -23% |
| Net income attributable to KBR | $202 million | $281 million | -28% |
| Diluted EPS | $1.41 | $1.99 | Down |
| Cash flow from operations | $256 million | $165 million | +$91 million |
| Cash and equivalents | $712 million | $739 million | -$27 million |
| Long-term debt | $1.183 billion | $1.226 billion | -$43 million |
| Backlog | $14.636 billion | $13.497 billion | +8% |
Gross margin was approximately 11.6% in 2019 versus 11.9% in 2018. Operating margin declined to approximately 6.4% from 9.5%, primarily because 2018 included a $108 million gain on consolidation of Aspire Defence entities and 2019 included lower equity earnings and higher corporate expenses. Net margin attributable to KBR was approximately 3.6% versus 5.7%.
Balance-sheet assets were $5.364 billion and shareholders’ equity was $1.857 billion at December 31, 2019. KBR had approximately $1.2 billion of total indebtedness under its Senior Credit Facility and Convertible Notes, plus $7 million of long-term nonrecourse project-finance debt. The company reported compliance with its debt covenants.
Segment Results
| Segment | 2019 Revenue | 2019 Gross Profit | Key Change |
|---|---|---|---|
| Government Solutions | $3.925 billion | $430 million | Revenue +14%; gross profit +23% |
| Technology Solutions | $374 million | $118 million | Revenue +26%; gross profit +11% |
| Energy Solutions | $1.339 billion | $100 million | Revenue +16%; gross profit -25% |
| Non-strategic Business | $1 million | $5 million | Close-out activities |
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow increased to $256 million from $165 million, supported by improved working capital, distributions from unconsolidated affiliates and collection of $57 million related to a private-security matter.
- Investing cash outflow was $158 million, primarily reflecting $146 million of investments in equity-method joint ventures, including $141 million contributed to the Ichthys LNG project.
- Financing cash outflow was $133 million, including $70 million of debt repayments and $46 million of dividends.
- KBR had $712 million of cash, but $260 million was held by consolidated joint ventures and Aspire Defence entities and was restricted to project activities.
- Committed and uncommitted letter-of-credit capacity totaled approximately $1.4 billion, with approximately $325 million utilized at year-end.
- The company stated that cash, operating cash flow and available credit were sufficient for the next 12 months.
- The regular quarterly dividend was $0.10 per share, and 2019 dividends declared totaled $0.32 per share. Approximately $160 million remained available under the share-repurchase authorization, although no open-market repurchases occurred in 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected organic expansion in Government Solutions, a full year of SGT operations, stronger Technology Solutions equipment sales and new Energy Solutions awards.
- Government Solutions benefited from higher U.S. government logistics and engineering volumes, SGT contributions and favorable settlements on legacy matters.
- Energy Solutions gross profit declined because favorable 2018 items did not recur, major EPC projects had lower margins and Ichthys-related earnings weakened.
- Equity earnings from unconsolidated affiliates fell to $35 million from $79 million, primarily because of the substantial completion of a North Sea project, an unfavorable Ichthys-related arbitration ruling and the absence of a 2018 tax-liability release.
- 2018 operating income included the $108 million Aspire consolidation gain; no comparable gain was recorded in 2019.
- General and administrative expense increased 16% to $341 million, driven mainly by corporate costs, information technology and rebranding.
- Cash flow from operations improved materially despite increased project activity and working-capital needs.
- Backlog increased 8% to $14.6 billion; 31% was expected to be recognized as revenue in 2020, although backlog is subject to termination, funding, scope and execution risks.
Outlook, Risks and Unusual Items
Management cited continued opportunities from U.S. defense and space spending, international defense programs and recurring government services. In hydrocarbons, commodity-price volatility was pressuring customer capital spending, but management pointed to robust bookings and a significant mix of operations-and-maintenance work as sources of stability. The filing does not provide a formal quantitative 2020 revenue or earnings guidance range.
- Ichthys LNG: Construction and commissioning were complete, but significant commercial and legal disputes remained. KBR had contributed approximately $484 million to JKC on an inception-to-date basis and had $164 million of letters of credit outstanding. JKC claims against the Consortium were approximately $1.9 billion; unfavorable outcomes could require additional funding and materially affect earnings, liquidity and cash flow.
- Funding Deed exposure: KBR’s proportionate share of amounts potentially subject to refund if unresolved by December 31, 2020 was $158 million.
- Government contracts: The LOGCAP V award was under protest. U.S. government audits, Form 1s, cost disallowances, False Claims Act matters and contract termination rights could affect recoveries and future awards.
- Legacy government matters: The company carried $28 million of questioned LogCAP III costs in claims receivable and a $41 million reserve for potentially unallowable costs. Several legal matters remained unresolved.
- Pensions: Defined-benefit plans had an aggregate funding deficit of approximately $277 million. KBR expected $47 million of pension contributions in 2020, including approximately £33 million annually under its U.K. funding agreement.
- Accounting estimates: Revenue recognition depends heavily on estimated costs to complete, claims, change orders, supplier recoveries and variable consideration. Approximately $978 million of such claims and recoveries were included in project estimates at completion at year-end.
- Other contingencies: The filing disclosed Unaoil-related DOJ, SEC and U.K. Serious Fraud Office investigations, a potential Chadian employee claim, and North West Rail Link claims of up to approximately A$300 million against a joint venture in which KBR has a 33% participation interest.
- Subsequent event: On February 7, 2020, KBR amended and refinanced its Senior Credit Facility, extending certain maturities to 2025 and 2027 and changing facility amounts and covenants.
Most Important Facts for Investors to Verify
- Whether Ichthys LNG claims, arbitration outcomes and the $158 million Funding Deed exposure produce additional cash requirements, losses or recoveries.
- The status and economics of LOGCAP V following the protest, including award timing, funding and recompete performance.
- The sustainability of Government Solutions growth and whether favorable legacy settlements or other one-time items recur.
- Energy Solutions margins, backlog conversion and exposure to further cost overruns or claims on fixed-price projects.
- Actual availability of cash, considering $260 million held in consolidated joint ventures and other local or project restrictions.
- Debt repayment requirements, covenant headroom, variable-rate exposure and the potential dilution associated with the convertible notes and warrants.
- Funding requirements for the U.K. pension plan and sensitivity to discount rates, asset returns and future actuarial valuations.
- Realizability of deferred tax assets, including $257 million of foreign tax credit carryforwards and related valuation allowances.
- The outcome of disclosed government investigations, litigation, environmental matters and joint-and-several guarantees.