KBR, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2019. The request metadata identifies “2018 Q1,” but the filing is for the first quarter of 2019 and compares results with the first quarter of 2018. Financial statements are unaudited.
Business Context
KBR provides professional services, technologies, engineering, program management, construction, logistics, operations and maintenance services to government, defense, space, aviation and hydrocarbons customers. Reportable segments are Government Solutions, Technology Solutions, Energy Solutions, Non-strategic Business and Other.
Government Solutions represented approximately 73% of consolidated revenue and benefited from organic growth, the 2018 acquisition of Stinger Ghaffarian Technologies, and increased activity in logistics and engineering. Energy Solutions declined as projects, including Ichthys LNG-related activities, wound down.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,340 million | $1,038 million | +29% |
| Gross profit | $153 million | $115 million | +33% |
| Operating income | $78 million | $181 million | -57% |
| Net income attributable to KBR | $40 million | $138 million | -71% |
| Diluted EPS | $0.28 | $0.97 | -$0.69 |
| Cash flow from operations | $48 million | $(130) million | Improved by $178 million |
| Cash and equivalents | $708 million | $486 million at March 31, 2018 | Comparability affected by 2018 transactions |
Margins: Gross margin was approximately 11.4%, compared with 11.1% in the prior-year quarter. Operating margin was approximately 5.8%, compared with 17.4%, and net margin attributable to KBR was approximately 3.0%, compared with 13.3%. The prior-year results included a $115 million gain on consolidation of Aspire Defence entities.
Segment performance: Government Solutions revenue increased 44% to $975 million and gross profit increased to $90 million. Technology Solutions revenue increased 48% to $92 million and gross profit increased to $27 million. Energy Solutions revenue declined 9% to $272 million, while gross profit increased to $36 million, partly due to a U.S. ammonia-project settlement. Energy Solutions equity-method earnings declined to a $6 million loss from $15 million of earnings.
Debt and liquidity: Total long-term debt was $1.25 billion before current-portion classification, including $190 million of Term Loan A, $794 million of Term Loan B and $350 million of convertible notes. The company had no revolving borrowings, $708 million of cash and approximately $983 million of remaining capacity under committed and uncommitted letter-of-credit facilities. KBR was in compliance with its debt covenants at March 31, 2019.
Other balance-sheet items: Total assets were $5.32 billion and total shareholders’ equity was $1.80 billion. Pension obligations were $240 million. Adoption of the new lease standard added operating lease assets and liabilities and resulted in a $21 million cumulative increase to retained earnings.
Dividends and repurchases: The quarterly dividend was $0.08 per share. KBR paid $11 million in dividends and withheld or repurchased $3 million of shares, primarily for employee tax obligations.
Cash Flow and Capital Allocation
- Operating cash flow of $48 million reflected net income and working-capital requirements, including a $48 million cash use from increased accounts receivable.
- Investing cash flow was $(69) million, primarily reflecting approximately $69 million invested in the Ichthys LNG joint venture.
- Financing cash flow was $(17) million, primarily dividends and debt payments.
- Cash declined by $31 million during the quarter, after a $7 million benefit from foreign-exchange movements.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $302 million, primarily from Government Solutions growth, the SGT acquisition and higher Technology Solutions activity.
- Operating income and net income declined substantially because Q1 2018 included the $115 million Aspire consolidation gain, which did not recur.
- Interest expense increased to $25 million from $6 million due to increased borrowings and the convertible notes.
- Equity in earnings of unconsolidated affiliates fell to zero from $23 million, mainly due to lower Ichthys LNG activity and an equity-method investment impairment.
- Operating cash flow improved from a $130 million use to a $48 million source.
- Backlog increased to $13.60 billion from $13.50 billion at December 31, 2018. Remaining performance obligations under ASC 606 were $9.8 billion.
- Effective January 1, 2019, KBR adopted ASC 842 for leases and renamed its principal segments; the adoption did not materially affect earnings or cash flow.
Guidance, Outlook and Management Commentary
The filing does not provide a specific earnings or revenue guidance range. Management described the government-services outlook as favorable, supported by defense and space spending, while noting that U.S. government awards may be affected by competitive bidding, protests, funding changes and shifting priorities.
Management reported improving opportunities in LNG, midstream, petrochemicals, chemicals and fertilizers, but stated that hydrocarbons activity remains sensitive to commodity prices and customer capital spending. KBR expects existing cash, operating cash flow and available credit facilities to support operations for at least the next 12 months.
Approximately 31% of backlog was expected to be executed within one year. The company also reported approximately $3.3 billion of priced U.S. government contract options not included in backlog.
Risks, Contingencies and Unusual Items
- Ichthys LNG: KBR owns 30% of the JKC joint venture and contributed approximately $69 million during the quarter. Total expected contributions to complete the project were approximately $500 million, leaving approximately $87 million expected later in 2019, subject to change.
- Ichthys-related claims and unapproved change orders included approximately $989 million in project estimates at March 31, 2019, with KBR’s proportionate share of certain Funding Deed amounts at $161 million. If claims are unresolved by December 31, 2020, amounts funded under the Funding Deed may require repayment.
- JKC claims approximately $1.9 billion against the consortium that abandoned the combined-cycle power plant. KBR may bear its pro rata share of unrecovered completion costs and may face additional funding requirements.
- Ichthys performance and warranty letters of credit totaled $164 million.
- U.S. government Form 1s questioned $134 million of billed costs; $73 million remained recorded as claims and accounts receivable. KBR had accrued $41 million for unallowable costs.
- Legacy LogCAP III matters include government audits, claims, litigation and False Claims Act allegations. The filing states that reserves were recorded where probable, but outcomes and timing remain uncertain.
- KBR is cooperating with DOJ, SEC and U.K. Serious Fraud Office investigations concerning Unaoil-related activities.
- The company has a $240 million pension obligation and expects approximately $39 million of pension contributions during 2019, of which $9 million had been paid by March 31.
- Foreign-exchange and interest-rate risks remain relevant. A 50-basis-point increase in interest rates was estimated to increase pre-tax interest expense by approximately $2 million over the next 12 months, net of swaps.
Important Facts for Investors to Verify
- Whether Ichthys claims, arbitration proceedings, power-plant completion costs and potential Funding Deed repayment obligations materially change KBR’s future cash needs or profitability.
- The sustainability of Government Solutions growth and the contribution from SGT relative to organic growth.
- The extent to which the nonrecurring Aspire gain distorts year-over-year earnings comparisons.
- Progress in converting the $13.6 billion backlog and $9.8 billion of remaining performance obligations into revenue and cash flow.
- Compliance with leverage and interest-coverage covenants as Ichthys funding continues.
- Resolution of U.S. government Form 1s, LogCAP III disputes, False Claims Act matters and related receivables.
- Future U.K. pension funding requirements and any effect on liquidity.
- The filing’s forward-looking statements and risk factors, which remain subject to contract execution, customer funding, project estimates, litigation outcomes and foreign-market conditions.