KBR, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2023, compared with September 30, 2022. The request metadata identifies “2022 Q3,” but the supplied filing is KBR’s 2023 third-quarter Form 10-Q, filed November 2, 2023.
Business Context and Reporting Period
KBR provides Government Solutions services to defense, intelligence, space, aviation and other government customers, and Sustainable Technology Solutions focused on energy transition, process technologies, engineering and related services. The company changed its fiscal year-end prospectively to the Friday closest to December 31; the 2023 third quarter contained 90 days versus 91 days in the comparable 2022 quarter.
KBR reported two core segments: Government Solutions and Sustainable Technology Solutions. Backlog was $17.3 billion at September 29, 2023, up from $15.6 billion at December 31, 2022. Remaining performance obligations were $12.1 billion, with approximately 36% expected to be recognized within one year.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $1.770 billion | $1.626 billion | $5.226 billion | $4.956 billion |
| Gross profit | $244 million | $225 million | $740 million | $622 million |
| Operating income | $147 million | $125 million | $301 million | $221 million |
| Net income attributable to KBR | $(21) million | $74 million | $(286) million | $97 million |
| Diluted EPS | $(0.16) | $0.49 | $(2.10) | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $248 million | $336 million |
- Q3 revenue increased 9%; nine-month revenue increased 5%.
- Approximate gross margin was 13.8% in Q3 2023 versus 13.8% in Q3 2022, and 14.2% for the first nine months versus 12.5% in the prior-year period.
- Approximate operating margin was 8.3% in Q3 2023 versus 7.7% in Q3 2022, and 5.8% for the first nine months versus 4.5% in the prior-year period.
- Government Solutions generated Q3 revenue of $1.345 billion and operating income of $108 million. Sustainable Technology Solutions generated $425 million of revenue and $84 million of operating income.
- Cash and cash equivalents were $348 million at September 29, 2023, compared with $389 million at December 31, 2022. Cash declined by $41 million during the first nine months.
- Total debt was $1.755 billion, including $239 million classified as current. Long-term debt was $1.516 billion.
- KBR had $1 billion of committed Revolver capacity and $376 million of bilateral and uncommitted credit lines for letters of credit. Total remaining capacity was approximately $877 million.
- The company was in compliance with its debt covenants at quarter-end and stated that cash, operating cash flow, credit availability and other lines of credit should support operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- STS revenue increased 28% in Q3 and 35% for the first nine months, driven by technology sales, engineering and professional services. STS operating income rose to $243 million for the first nine months from a $18 million operating loss in the prior-year period.
- Government Solutions revenue declined 1% for the first nine months, primarily because 2022 included approximately $309 million of Operation Allies Welcome contingency revenue and because Aspire construction activity declined. This was partly offset by contract growth and increased European Command activity.
- Equity earnings from unconsolidated affiliates improved to $78 million from a $103 million loss. The prior-year period included a $137 million non-cash Ichthys LNG settlement-related charge and a separate joint-venture charge.
- KBR recorded a $144 million legal settlement charge related to the Howard qui tam matter; $109 million was paid in July 2023. The company denies liability or wrongful conduct.
- KBR recorded $428 million of charges associated with its Convertible Notes, including derivative bifurcation, debt extinguishment, warrant settlement and accretion. These charges drove the reported nine-month net loss.
- The company repurchased $125 million of common stock under its authorized program and $12 million of shares withheld for employee tax obligations during the first nine months. $326 million remained available under the $500 million authorization.
- Operating cash flow decreased by $88 million year over year, primarily due to the legal settlement payment and working-capital changes.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear quantitative earnings or revenue outlook in the supplied filing. Management expects continued opportunities from defense modernization, space, cyber, AUKUS-related priorities, energy transition, decarbonization, hydrogen, ammonia and circular-economy solutions.
- U.S. fiscal 2024 appropriations remained uncertain under a continuing resolution through November 16, 2023. A prolonged government shutdown could cause program cancellations, delays, disruptions or payment issues.
- Project profitability remains exposed to labor, materials, equipment, productivity, weather, fixed-price execution, contract estimates, claims and disputes.
- KBR’s joint ventures and guarantees may expose it to additional funding, performance and contingent liabilities. The company could not estimate the maximum potential payments under certain joint-venture performance guarantees.
- The Ichthys LNG project continues to carry paint and insulation-related contingent exposure. KBR’s proportionate share of the related provision contributed to a $52 million net liability position associated with its JKC investment.
- Government contracts remain subject to DCAA and DCMA audits, potential cost disallowances, investigations, fines, suspension of payments and other remedies. KBR accrued $44 million for probable and estimable unallowable costs associated with open government matters.
- The U.K. pension plan had an $83 million funding surplus at quarter-end, but required contributions may change with interest rates and asset performance. Minimum annual contributions of approximately £33 million are scheduled through March 2028.
- The Convertible Notes matured on November 1, 2023, after the reporting date. The $250 million principal and $593 million aggregate cash conversion consideration were funded with $343 million received from note hedges, $200 million of Revolver borrowings and $50 million of cash. Warrants remained outstanding as of November 1, 2023.
Important Facts for Investors to Verify
- Post-quarter-end debt and liquidity following the $200 million Revolver borrowing and cash settlement of the Convertible Notes.
- The remaining economic exposure and potential dilution or cash cost from outstanding warrant transactions.
- Whether STS growth and improved joint-venture earnings are sustainable after the non-recurring 2022 Ichthys charges.
- Government appropriations, continuing-resolution outcomes and their effect on KBR’s funded backlog and program timing.
- Resolution and ultimate cost of open U.S. government matters, the LogCAP III closeout, the FKTC appeal and other litigation.
- Execution risk in the $17.3 billion backlog, including the $133 million of backlog associated with contracts currently in a loss position.
- Availability and cost of receivables monetization, revolving credit, letters of credit and surety capacity.
- Future share repurchases and dividends relative to leverage, cash generation and the company’s stated capital-allocation priorities.