The purpose of MD&A is to disclose material changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. The MD&A should be read in conjunction with the condensed consolidated financial statements, accompanying notes and our 2021 Annual Report on Form 10-K.
KBR Inc., a Delawarecorporation ("KBR"), delivers science, technology and engineering solutions to governments and companies around the world. Drawing from its rich 100-year history and culture of innovation and mission focus, KBR creates sustainable value by combining deep domain expertise with its full life cycle capabilities to help clients meet their most pressing challenges. Our capabilities and offerings include the following: •Scientific research such as quantum science and computing; health and human performance; materials science; life science research; and earth sciences; •Defense systems engineering such as rapid prototyping; test and evaluation; aerospace acquisition support; systems and platform integration; and sustainment engineering; •Operational support such as space domain awareness; C4ISR; human spaceflight and satellite operations; integrated supply chain and logistics; and military aviation support; •Information operations such as cyber analytics and cybersecurity; data analytics; mission planning systems; virtual/augmented reality and technical training; and artificial intelligence and machine learning; and •Technology such as proprietary, sustainability-focused process licensing; advisory services focused on energy transition; and digitally-enabled asset optimization solutions. KBR's strategic growth vectors include: •Defense modernization; •Space superiority; •Health and human performance; and •Sustainable technology. Key customers include U.S. DoDagencies such as the U.S. Army, U.S. Navyand U.S. Air Force, Missile Defense Agency, National Geospatial-Intelligence Agency, National Reconnaissance Officeand other intelligence agencies; U.S.civilian agencies such as NASA, U.S. Geological Surveyand National Oceanic and Atmospheric Administration; the U.K. Ministry of Defence, London Metropolitan Policeand other U.K.Crown Services; the Royal Australian Air Force, Navyand Army; other national governments; and a wide range of commercial and industrial companies. Our deployment priorities are to fund organic growth, maintain responsible leverage, maintain an attractive dividend, make strategic, accretive acquisitions and repurchase shares. Our acquisition thesis is centered around moving upmarket, expanding capabilities and broadening customer sets across strategic growth vectors. KBR also develops and prioritizes investment in technologies that are disruptive, innovative and sustainability- and safety-focused. These technologies and solutions enable clients to achieve a cleaner, greener, more energy efficient global future. On October 20, 2021, we acquired Frazer-Nash Consultancy Limited("Frazer-Nash"), a leading provider of high-end systems engineering, assurance and technology advisory services used to solve complex challenges. Frazer-Nash provides a broad range of professional advisory services across the defense, renewable energy and critical infrastructure sectors primarily in the U.K.and Australia. Additional information relating to the Frazer-Nash acquisition is described in Note 4 to our condensed consolidated financial statements. 35
Business environment and trends
March 15, 2022, President Bidensigned into law the $1.5 trillionConsolidated Appropriations Act 2022, which includes $782 billionin defense spending, of which $742 billionis for the DoD, and $730 billionfor non-defense discretionary spending representing an increase from the fiscal 2021 budget of 6% and 7%, respectively. The fiscal 2022 U.S. defense spending budget prioritizes and furthers a national security strategy to confront near peer threats around the world, enhances the DoD'scybersecurity strategy and cyber warfare capabilities, increases the priority of military space superiority, directs innovation to meet long-range emerging threats and continues the restoration of military readiness. The budget includes several measures to strengthen emerging technologies including cyber-science and technologies, artificial intelligence, directed energy, hypersonics and biotechnologies. Additionally, the fiscal 2022 defense budget includes $13.6 billionfor military and humanitarian support for Ukraine. The non-defense discretionary budget includes $24 billion, or a 3% increase, in funding for NASA to support the continuation of scientific research and exploration as well as increased funding across all agencies to tackle climate change. On March 28, 2022, President Bidenprovided his proposed fiscal 2023 budget of $1.6 trillion, which included $813 billionin defense spending, of which $773 billionis for the DoD, and $785 billionfor non-defense discretionary spending which represents an increase from the fiscal 2022 budget of 4% and 8%, respectively. The U.S.defense spending budget prioritizes initiatives outlined in the fiscal 2022 budget in addition to, among other things, increased support for the U.S.European Command. The non-defense discretionary spending proposal includes $26 billion, or an 8% increase from the fiscal 2022 budget, in funding for NASA to support the continuation of scientific research, exploration and space technology, as well as increased funding across all agencies to address the climate crisis. In connection with Operation Allies Welcome ("OAW"), KBR has been engaged by the U.S. DoDto provide humanitarian support across numerous military bases to those awaiting resettlement. Such support includes temporary housing, food service, medical care and other services. We substantially completed this non-recurring OAW support in the first quarter of 2022. Internationally, our Government Solutions work is performed primarily for the U.K. Ministry of Defenceand the Australian Department of Defence. The U.K.government has committed to a 14% increase in defense spending over the coming four years. Recognizing the importance of strong defense and the role the U.K.plays across the globe, the U.K.has prioritized investment in military research and investment in key areas to advance and develop capabilities around artificial intelligence, cyber security and space superiority. The Australian government continues to invest in defense spending, with particular focus on enhancing regional security, modernizing defense capabilities, strengthening cyber defenses and promoting broader economic stability. In November 2021, we announced that HomeSafe Alliance LLC("HomeSafe"), a KBR led joint venture with Tier One Relocation, was awarded the global household goods contract by U.S.Transportation Command. The contract ceiling value is $20 billionwith a potential 9-year term, inclusive of all options periods. HomeSafe is expected to be the exclusive household goods move management service provider for the U.S.Armed Forces, U.S. DoDcivilians and their families. Under this contract, HomeSafe plans to modernize and infuse technology to improve the domestic and international relocation experience for all military personnel and their families. The award of this program is being protested by the non-prevailing parties at the Court of Federal Claimsand the transition has been placed on hold.
With defense and civilian budgets driven in part by political instability, military conflict, aging platforms and infrastructure, and the need for technological advancements, we expect continued opportunities to deliver solutions and critical work technologies aligned with the critical priorities of our customers and our country.
Sustainable Technology Outlook
Long-range commercial market fundamentals are supported by global population growth, expanding global development and an acceleration of demand for energy transition and renewable energy sources. Clients continue to prioritize investment in digital solutions to optimize operations, increase end-product flexibility and energy efficiency, reduce unplanned downtime and minimize environmental footprint. As companies continue to commit to near-term carbon neutrality and longer-range net-zero carbon emissions, we expect spending to continue in areas such as decarbonization; carbon capture, utilization and sequestration; biofuels; and circular economy. Further, leading companies across the world are proactively evaluating clean energy alternatives, including hydrogen and green ammonia which complements KBR's proprietary process technology and capabilities. We expect climate change and energy transition to continue to be areas of priority and investment as many countries, including the
U.S., look to boost their economies and invest in a cleaner future. In advance of the Conference of the Parties 26 meeting in Scotland, the White Housereleased details on its strategy to achieve greenhouse gas emission reduction targets as part of their agenda. On November 15, 2021, President Bidensigned the bi-partisan Infrastructure Investmentand Jobs Act bill into law which includes climate provisions focused on transportation and resiliency. In response to Russia'smilitary invasion of Ukraine, we announced our intent to exit commercial projects in Russiain a responsible manner. We expect that the reconfiguration of global supply and demand stemming from expanding sanctions on Russiawill result in near and mid-term investments to enable energy, chemical and food production security globally.
KBR’s business is organized into two main and one non-main business segments as follows:
Core business segments • Government Solutions • Sustainable Technology Solutions Non-core business segment • Other
See additional information on our business segments in Note 2 to our condensed consolidated financial statements.
Three months completed
The information below is an analysis of our consolidated results for the three months ended
March 31, 2022compared to the three months ended March 31, 2021. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments. Consolidated Results
Three months completed
2022 vs. 2021 Dollars in millions 2022 2021 (1) $ % Revenues
$ 1,714 $ 1,461 $ 25317 % Cost of revenues $ (1,518) $ (1,293) $ 22517 % Gross profit $ 196 $ 168$ 28 17 % Equity in earnings (losses) of unconsolidated affiliates $ (118) $ 12 $ (130)n/m Selling, general and administrative expenses $ (107) $ (89)$ 18 20 % Acquisition and integration related costs $ (1) $ (1)$ - n/m Restructuring charges and asset impairments $ (1)$ - $ 1 n/m Loss on disposition of assets and investments $ - $ (1)$ (1) n/m Operating income (loss) $ (31) $ 89 $ (120)(135) % Interest expense $ (20) $ (19)$ 1 5 % Other non-operating expense $ - $ (3)$ (3) (100) % Income (loss) before provision for income taxes and noncontrolling interests $ (51) $ 67 $ (118)(176) % Provision for income taxes $ (19) $ (17)$ 2 n/m Net income (loss) $ (70) $ 50 $ (120)(240) % Net income attributable to noncontrolling interests $ 1 $ 1$ - n/m Net income (loss) attributable to KBR $ (71)0 $ 49 $ (120)(245) %
(1) Adjusted for the adoption of ASU 2020-06 using the full retrospective method.
n/m - not meaningful Revenues. Revenues increased by
$253 million, or 17%, to $1.7 billionfor the three months ended March 31, 2022compared to $1.5 billionfor three months ended March 31, 2021. The increase was primarily driven by our GS business segment attributable to continued organic growth in our GS business units, including the OAW program which contributed $269 millionin 2022, and the acquisition of Frazer-Nash in October 2021. This growth was partially offset by reduced GS operational tempo in the Middle East, the impact of our announced intent to exit commercial operations in Russia, timing of certain STS projects and the completion or near completion of remaining projects that we strategically exited in 2020. Gross profit. The increase in overall gross profit of $28 million, or 17%, was primarily driven by items discussed above and lower amortization of intangibles from the Centauri acquisition. Equity in earnings (losses) of unconsolidated affiliates. The overall decrease in equity in earnings (losses) of unconsolidated affiliates was primarily driven by a non-cash charge in the amount of $137 millionassociated with the Ichthys LNG Projectrecognized in the current quarter as a result of a settlement agreement entered into with JKC and the consortium of subcontractors of the Combined Cycle Power Plant. As a result of the settlement agreement, the outstanding claims and disputes between the parties related to the Combined Cycle Power Plant have been resolved and the parties agreed to withdraw all claims and terminate all ongoing arbitration and court proceedings.
Selling, general and administrative expenses. Selling, general and administrative expenses during the three months ended
38 -------------------------------------------------------------------------------- Acquisition and integration related costs. Acquisition and integration related costs were
$1 millionfor each of the three months ended March 31, 2022and 2021 primarily due to costs incurred related to the Company's historical acquisitions.
Loss on disposal of assets and investments. Loss on disposal of assets and investments remained substantially constant for each of the three months ended
Interest charges. The increase in interest expense was primarily due to increased borrowings to fund the acquisition of Frazer-Nash in
Other non-operating charges. Other non-operating expenses include interest income, foreign exchange gains and losses and other non-operating income or expense items, with the variation being mainly due to foreign exchange gains and losses.
Provision for income taxes. The provision for income taxes for the three months ended
March 31, 2022reflects a (37)% tax rate as compared to a 25% tax rate for the three months ended March 31, 2021. The effective tax rate of (37)% for the three months ended March 31, 2022was primarily impacted by the non-cash charge in equity in earnings associated with the Ichthy's LNG project. Excluding the tax impact of discrete items, our tax rate would be 25% for the three months ended March 31, 2022. See Note 11 to our condensed consolidated financial statements for further discussion on income taxes. Net income attributable to noncontrolling interests. The net income attributable to noncontrolling interests remained materially consistent for each of the three months ended March 31, 2022and 2021. 39 --------------------------------------------------------------------------------
Operating results by business segment
Three months completed
2022 vs. 2021 Dollars in millions 2022 2021 $ % Revenues Government Solutions
$ 1,459 $ 1,164 $ 29525 % Sustainable Technology Solutions 255 297 (42) (14) % Total revenues $ 1,714 $ 1,461 $ 25317 % Gross profit Government Solutions $ 159 $ 116$ 43 37 % Sustainable Technology Solutions 37 52 (15) (29) % Total gross profit $ 196 $ 168$ 28 17 % Equity in earnings (losses) of unconsolidated affiliates Government Solutions $ 10 $ 7$ 3 43 % Sustainable Technology Solutions (128) 5 (133) n/m Total equity in earnings (losses) of unconsolidated affiliates $ (118) $ 12 $ (130)n/m Total selling, general and administrative expenses $ (107) $ (89)$ 18 20 %
Acquisition and integration costs
Restructuring charges and asset impairments
n/m Loss on disposition of assets and investments $ -
$ (1)$ (1) n/m Operating income (loss) $ (31) $ 89 $ (120)(135) % n/m - not meaningful Government Solutions GS revenues increased by $295 million, or 25%, to $1.5 billionfor the three months ended March 31, 2022, compared to $1.2 billionfor the three months ended March 31, 2021. The increase was primarily driven by organic revenue growth across our GS business units, including work associated with the OAW program which contributed $269 millionduring the three months ended March 31, 2022. Additionally, the increase is attributed to the acquisition of Frazer-Nash in October 2021. These increases were partially offset by reduced activity in the Middle East. GS gross profit increased by $43 million, to $159 millionfor the three months ended March 31, 2022, compared to $116 millionfor the three months ended March 31, 2021. The increase was primarily driven by items discussed above as well as lower amortization of intangibles from the Centauri acquisition. GS equity in earnings of unconsolidated affiliates increased by $3 millionto $10 millionfor the three months ended March 31, 2022, compared to $7 millionfor the three months ended March 31, 2021. The increase was primarily driven by better performance of joint ventures and increased work in our International business.
Sustainable technological solutions
STS revenues decreased by
$42 million, or 14%, to $255 millionfor the three months ended March 31, 2022, compared to $297 millionfor the three months ended March 31, 2021. STS gross profit decreased by $15 million, or 29%, to $37 million40 -------------------------------------------------------------------------------- for the three months ended March 31, 2022, compared to $52 millionin the three months ended March 31, 2021. The decreases in revenues and gross profit were primarily driven by the $12 millionnon-cash impact to gross profit resulting from our announced intent to exit commercial operations in Russia, timing of certain STS projects and the completion or near completion of remaining projects that we strategically exited in 2020. STS equity in earnings (losses) of unconsolidated affiliates decreased by $133 millionto $128 millionloss for the three months ended March 31, 2022, compared to $5 millionin equity earnings for the three months ended March 31, 2021. The decrease was primarily driven by a non-cash charge in the amount of $137 millionrelating to the settlement agreement with the consortium of subcontractors of the Combined Cycle Power Plant.
Unfilled order book
Backlog generally represents the dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by our consolidated and unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog. We define backlog, as it relates to
U.S.government contracts, as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period (including customer approved option periods) for which work scope and price have been agreed with the customer. We define funded backlog as the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. We define unfunded backlog as the total backlog less the funded backlog. Our GS backlog does not include any estimate of future potential delivery orders that might be awarded under our government-wide acquisition contracts, agency-specific indefinite delivery/indefinite quantity contracts or other multiple-award contract vehicles, nor does it include option periods that have not been exercised by the customer. Within our GS business segment, we calculate estimated backlog for long-term contracts associated with the U.K.government's PFIs based on the aggregate amount that our client would contractually be obligated to pay us over the life of the project. We update our estimates of the future work to be executed under these contracts on a quarterly basis and adjust backlog if necessary. We have included in the table below our proportionate share of unconsolidated joint ventures' estimated backlog. As these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our results of operations. Our proportionate share of backlog for projects related to unconsolidated joint ventures totaled $2.5 billionat March 31, 2022, and $2.6 billionat December 31, 2021. As a result of our intent to exit commercial projects in Russia, ending backlog was reduced by $56 millionas of March 31, 2022.
The following table summarizes our backlog by business segment at
March 31, December 31, Dollars in millions 2022 2021 Government Solutions
$ 11,572 $ 12,628Sustainable Technology Solutions 2,412 2,345 Total backlog $ 13,984 $ 14,973We estimate that as of March 31, 2022, 29% of our backlog will be executed within one year. Of this amount, 89% will be recognized in revenues on our condensed consolidated statement of operations and 11% will be recorded by our unconsolidated joint ventures. As of March 31, 2022, $71 millionof our backlog relates to active contracts that are in a loss position. 41 -------------------------------------------------------------------------------- As of March 31, 2022, 11% of our backlog was attributable to fixed-price contracts, 46% was attributable to PFIs, 25% was attributable to cost-reimbursable contracts and 18% was attributable to time-and-materials contracts. For contracts that contain fixed-price, cost-reimbursable and time-and-materials components, we classify the individual components as either fixed-price, cost-reimbursable or time-and-materials according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As of March 31, 2022, $8.5 billionof our GS backlog was currently funded by our customers. As of March 31, 2022, we had approximately $4.6 billionof priced option periods not yet exercised by the customer for U.S.government contracts that are not included in the backlog amounts presented above. The difference between backlog of $14.0 billionand the remaining performance obligations as defined by ASC 606 of $10.9 billionis primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligations. See Note 3 to our condensed consolidated financial statements for discussion of the remaining performance obligations.
Transactions with joint ventures
We perform many of our projects through incorporated and unincorporated joint ventures. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our subcontractor revenues or expenses. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. See Note 8 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. The information discussed therein is incorporated by reference into this Part I, Item 2. Legal Proceedings Information relating to various commitments and contingencies is described in Notes 6, 12 and 13 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2. 42 --------------------------------------------------------------------------------
Cash and capital resources
Liquidity is provided by available cash and cash equivalents, cash generated from operations, our Senior Credit Facility, (as defined below) and access to capital markets. Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and stage of completion of our projects. We often receive cash in the early phases of our technology projects. On time-and-material and cost reimbursable contracts, we may utilize cash on hand or availability under our Senior Credit Facility to satisfy any periodic operating cash requirements for working capital, as we incur costs and subsequently invoice our customers. STS services projects may require us to provide credit support for our performance obligations to our customers in the form of letters of credit, surety bonds or guarantees. Our ability to obtain new project awards in the future may be dependent on our ability to maintain or increase our letter of credit and surety bonding capacity, which may be further dependent on the timely release of existing letters of credit and surety bonds. As the need for credit support arises, letters of credit may be issued under the Revolver (as defined below) or with lending counterparties on a bilateral, syndicated or other basis. As discussed in Note 10 "Debt and Other Credit Facilities" of our condensed consolidated financial statements, on
November 18, 2021, we entered into Amendment No. 5 under our existing Credit Agreement, dated as of April 25, 2018("Pro Rata Facilities") consisting of a $1 billionrevolving credit facility (the "Revolver"), a $442 millionTerm Loan A, ("Term Loan A") with debt tranches denominated in US dollars, Australian dollars and British pound sterling and a $512 millionTerm Loan B ("Term Loan B"), with an aggregate capacity of $1.954 billion("Senior Credit Facility"). The Amendment, among other things, (i) established an additional tranche of £122.1 million in Term Loan A incurred by Kellogg Brown & Root Limited, a wholly owned indirect subsidiary of KBR, Inc., organized under the laws of Englandand Wales, (ii) increased capacity and flexibility under certain negative covenants, (iii) permits the netting of unrestricted cash up to a specified cap for purposes of calculating the leverage ratio and (iv) reduced the interest rate payable for applicable margins and commitment fees and extended the maturity dates to November 2026for Term Loan A and the Revolver. The maturity date of Term Loan B remained unchanged maturing February 2027.
We believe existing cash balances, internally generated cash flow, availability under our senior credit facility and other lines of credit are sufficient to support our business operations for the next 12 months. From
Total cash and cash equivalents
March 31, December 31, Dollars in millions 2022 2021 Domestic U.S. cash
$ 52$ 34 International cash 238 220 Joint venture and Aspire Defence project cash 122 116 Total $ 412$ 370 Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held by U.S.entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock. Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and maintaining sufficient cash balances to support our U.K.pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriations of our undistributed foreign earnings are generally free of U.S.tax but may incur withholding and/or state taxes. We consider our future U.S.and non- U.S.cash needs as 1) our anticipated foreign working capital requirements, including funding of our U.K.pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities, which may include acquisitions around the world, including whether foreign earnings are permanently reinvested. If management were to completely remove the indefinite investment assertion on all foreign subsidiaries, the exposure to local withholding taxes would be less than $9 million. Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available 43
for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture purposes or for paying dividends. As of
March 31, 2022, substantially all of our excess cash was held in interest bearing operating accounts or short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity.
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