KBR Announces Second Quarter 2023 Financial Results

Delivered Outstanding 1H23 Revenue and Cash Flow Results
Raises FY23 Adj. EBITDA² Guidance
Resolved Legacy Litigation and Partially Retired Outstanding Convertible Notes

HOUSTON, July 27, 2023 /PRNewswire/ -- KBR, Inc. (NYSE: KBR) today announced its second quarter 2023 financial results and raised its FY 2023 financial guidance for Adjusted EBITDA².

"Once again, the people of KBR have delivered a strong quarter of financial and ESG performance, underpinned by our mission focus and exemplary operational discipline," said Stuart Bradie, KBR president and CEO. "Revenue and cash flow were strong in the first half of 2023. Net income was negatively impacted due to recorded losses in the second quarter associated with our convertible notes and the settlement of a legacy legal matter. First half Adjusted EBITDA² and Adjusted EPS² were outstanding, and as a result of strong, core business performance, we are pleased to announce an increase in our FY 2023 Adjusted EBITDA² guidance. In response to our ongoing ESG progress, we received a AAA designation in MSCI's 2023 ESG Ratings, we were named one of America's Climate Leaders 2023 by USA Today, and we received a gold medal rating from EcoVadis in recognition of our sustainability achievements, ranking KBR among the top 5% of assessed companies."

"Furthermore, we were pleased to announce the resolution of a legacy legal matter and the repurchase of $100 million in convertible notes and associated warrants. We anticipate these developments will help us reduce uncertainty and liquidity risk and open the door for opportunities for shareholder value appreciation as we continue to build on our strong momentum this year and the years to come."

New Business Awards
Backlog and options as of June 30, 2023 totaled $21.1 billion. Delivered 1.1x trailing-twelve-months (TTM) book-to-bill¹ as of June 30, 2023. Awarded $2.2 billion of bookings and options in the quarter.

Sustainable Technology Solutions (STS) delivered 1.4x TTM book-to-bill¹ as of June 30, 2023, including awards and achievements in the quarter as follows:

• Selected by Avina Clean Hydrogen to use KBR's K-GreeN® technology for its green ammonia project in the U.S.
• Signed a memorandum of understanding with Atlas Agro AG to license KBR's innovative K-GreeN® technology for Atlas' planned investment in a series of green nitrate plants.
• Signed a joint development agreement with ISU Chemical Co. Ltd. for the design of a commercial scale lithium sulfide unit for next generation battery technology.
• Awarded an engineering and design services contract from The Chemours Company to increase capacity and advance technology for its industry-leading Nafion™ exchange materials platform.
• Awarded a contract by Hindustan Petroleum Corporation Limited to implement KBR's market-leading supercritical solvent deasphalting technology, ROSE®, at a refinery in Mumbai.
• Signed a feasibility study contract by Southern Rock Energy Partners to support the development of a first-of-its-kind refinery in Cushing, Oklahoma.
• Announced a new fully integrated and flexible Autothermal Reforming (ATR) technology solution for the production of low carbon ammonia at mega scale.

Government Solutions (GS) delivered 0.9x TTM book-to-bill¹ as of June 30, 2023, including awards and achievements in the quarter as follows:

• Awarded a significant contract, Integrated Missions Operations Contract III, worth up to $1.9 billion for the continued support of NASA's human spaceflight programs, including the International Space Station, Artemis and Low Earth Orbit Commercialization. This has not yet been booked into backlog.
• Awarded a contract up to $69 million to provide mission-critical labor at three locations in the U.S. Central Command area of operations through the Air Force Contract Augmentation Program.
• U.S. Small Business Administration awarded KBR's Science and Space division the Dwight D. Eisenhower Award for Excellence in research and development.
• Expanded base operations support services in the Indo-Pacific region with a $24 million task award contract by the 94th Army Air and Missile Defense Command for support of two key communications sites in Japan.
• Announced that it is a subcontractor to McCallie Associates, Inc., a certified small business selected to provide mission and instrument systems engineering services at NASA's Goddard Space Flight Center in Maryland and Wallops Flight Facility in Virginia.
• Awarded several other contracts in Science & Space and Defense & Intel that have not been booked into backlog due to ongoing protest.

KBR recently published its 2022 Sustainability Report and received the following awards and achievements in the quarter:

• Received a AAA designation in MSCI's 2023 ESG (environmental, social and governance) Ratings. The AAA rating is MSCI's highest and is given to companies that are leading their industries in managing the most significant ESG risks and opportunities.
• Recognized by USA Today as one of America's Climate Leaders for 2023. This data-driven recognition ranks U.S.-based companies that have cut their carbon footprint in recent years.
• Earned a Gold Rating from EcoVadis, one of the world's largest and most trusted providers of business sustainability ratings for global supply chains. The Gold Rating places KBR in the top 5% of assessed companies.

Summarized Second Quarter Fiscal 2023 Financial Results

Financial Highlights for the Three Months Ended June 30, 2023

• Revenue of $1.8 billion, up 11% on an ex-OAW² year-over-year-basis
• Net income attributable to KBR of $(351) million; Adjusted EBITDA² of $191 million (11% Adjusted EBITDA² margin)
• Diluted EPS of $(2.60); Adjusted EPS² of $0.74
• Operating cash flows of $253 million
• Bookings and options of $2.2 billion during the quarter with 1.1x TTM book-to-bill¹

Financial Highlights for the Six Months Ended June 30, 2023

• Revenue of $3.5 billion, up 14% on an ex-OAW² year-over-year-basis
• Net income attributable to KBR of $(265) million; Adjusted EBITDA² of $373 million (11% Adjusted EBITDA² margin)
• Diluted EPS of $(1.95); Adjusted EPS² of $1.41
• Operating cash flows of $288 million
• Bookings and options of $5.3 billion during the year to date period with 1.1x TTM book-to-bill¹

Commentary on the Three Months Ended June 30, 2023
Revenues were $1.8 billion, up 8% compared to 2Q'22. Revenue ex-OAW² increased $173 million, or 11%, primarily attributable to increased activity to support exercises, training and other activities in the European Command, on-contract growth in Science & Space and Defense, and growing demand in Sustainable Technology Solutions primarily from engineering and professional services and technology licensing.

Net income attributable to KBR was $(351) million, down $445 million compared to 2Q'22, primarily due to a cash charge of $144 million in connection with the settlement of a legacy legal matter and a non-cash charge of $314 million recorded in connection with the accounting treatment resulting from an election to settle our convertible notes in cash upon maturity, the repurchase of a portion of our convertible notes and the termination of corresponding portions of the note hedge and warrants (discussed below) in the current quarter.

Adjusted EBITDA² was $191 million, up 3% compared to 2Q'22, with Adjusted EBITDA² margins of 11%. Adjusted EBITDA ex-Gains² was up 16% compared to 2Q'22.

Diluted earnings per share decreased in line with the decrease in net income attributable to KBR.  Adjusted earnings per share² increased due to increases in gross profit and equity in earnings from unconsolidated affiliates partially offset by increases in selling, general and administrative expenses and interest expense.

Operating cash flows were $253 million, up 102% compared to 2Q'22, due to revenue growth and recovery of timing items from prior quarter. 

Capital returned to shareholders totaled $95 million during the quarter, consisting of $76 million in share repurchases, inclusive of $75 million of open market repurchases and $1 million of repurchases to satisfy requirements of equity compensation plans, and $19 million in regular dividends.

Commentary on the Six Months Ended June 30, 2023
Revenues were $3.5 billion, up 4% compared to YTD 2Q'22. Revenue ex-OAW² increased $431 million, or 14%, primarily attributable to increased activity to support exercises, training and other activities in the European Command, on-contract growth in Science & Space and Defense, and growing demand in Sustainable Technology Solutions primarily from engineering and professional services and technology licensing.

Net income attributable to KBR was $(265) million, down $288 million compared to YTD 2Q'22. Excluding the non-cash charge of $314 million related to the convertible notes settlement method election and partial repurchase and partial unwind agreements in the current quarter (discussed below), Adjusted net income attributable to KBR² was $49 million, up $26 million, due to higher gross profit partially offset by higher selling, general and administrative expenses and interest expense, as well as prior year gains on sale of non-core assets and unrealized gain on investments that did not recur in the current year. 

Adjusted EBITDA² was $373 million, up 10% compared to YTD 2Q'22, with Adjusted EBITDA² margins of  11%. Adjusted EBITDA ex-Gains² was up 17% compared to YTD 2Q'22.

Diluted earnings per share decreased in line with the decrease in net income attributable to KBR.  Adjusted earnings per share² increased due to increases in gross profit and equity in earnings from unconsolidated affiliates partially offset by increases in selling, general and administrative expenses and interest expense.

Operating cash flows were $288 million, up 35% compared to YTD 2Q'22.

Capital returned to shareholders totaled $172 million during the year to date period, consisting of $137 million in share repurchases, inclusive of $125 million of open market repurchases and $12 million of repurchases to satisfy requirements of equity compensation plans, and $35 million in regular dividends.

Cash Settlement Method Election and Repurchase of Convertible Notes
During the quarter, KBR made an irrevocable election to use cash as the settlement method (as opposed to shares or a combination of cash and shares) to settle the principal and any excess value upon early conversion or maturity of the $350 million principal amount of convertible notes due November 2023. This election triggered a change in accounting treatment for both the convertible notes and the related note hedge. Previously these instruments qualified for an equity exemption under ASC 815 Derivatives and Hedging because share settlement was an available option. However, as of the date of the cash settlement election, the convertible notes and the related hedge no longer qualified for this exemption, and as a result, the conversion option of the convertible notes and the note hedge required fair value measurement on the date of such election.

Additionally, during the quarter, we entered into privately-negotiated transactions to repurchase $100 million in principal amount of the outstanding convertible notes, as well as the partial unwind agreements to terminate the corresponding portions of the note hedge and warrants.

As a result of the above cash settlement method election and partial repurchase, we recorded a $302 million loss composed of a $104 million loss on derivative bifurcation, a $70 million loss on debt extinguishment, and a $128 million charge related to the accretion of convertible notes debt discount. Additionally, as a result of the partial unwind agreements, we recorded a $12 million loss on settlement of warrants. These amounts, totaling $314 million, are recorded within "Charges associated with Convertible Notes" on our Condensed Consolidated Statement of Operations. Refer to Note 18 "Cash Election and Repurchase of Convertible Notes" in our Form 10-Q for the quarter ended June 30, 2023 for further details.

The impact of the accounting treatment does not change the economics or expected cash outflows or inflows associated with the convertible notes, note hedge or warrants.

Other Deployment Matters
During the quarter, KBR settled a legacy legal matter pending in federal court. Under the terms of the settlement, KBR denies any liability or wrongful conduct. As a result of the settlement, a charge of $144 million was recorded in operating income in the current quarter. Payment of the settlement amount occurred in July 2023.

Updated Fiscal 2023 Guidance
The table below summarizes updated fiscal 2023 guidance and represents our views as of July 27, 2023.

The company does not provide reconciliations of Adjusted EBITDA, Adjusted EPS, or Adjusted operating cash flows to the most comparable GAAP financial measures on a forward-looking basis because the company is unable to predict with reasonable certainty the ultimate outcome of legal proceedings, unusual gains and losses, and acquisition-related expenses without unreasonable effort, which could be material to the company's results computed in accordance with GAAP.

Conference Call Details
The company will host a conference call to discuss its second quarter financial results on Thursday, July 27, 2023, at 7:30 a.m. Central Time. The conference call will be webcast simultaneously through the Investor Relations section of KBR's website at investors.kbr.com. A replay of the webcast will be available shortly after the call on KBR's website or by telephone at +1.866.813.9403, passcode: 437878.

About KBR
We deliver science, technology and engineering solutions to governments and companies around the world. KBR employs approximately 33,000 people worldwide with customers in more than 80 countries and operations in 33 countries. KBR is proud to work with its customers across the globe to provide technology, value-added services, and long-term operations and maintenance services to ensure consistent delivery with predictable results. At KBR, We Deliver.
Visit www.kbr.com

Forward-Looking Statements
The statements in this press release that are not historical statements, including statements regarding our expectations for our future financial performance, effective tax rate, operating cash flows, contract revenues, award activity, our business strategy, interest expense, and our plans for raising and deploying capital, paying dividends and settling our convertible notes at maturity, are forward-looking statements within the meaning of the federal securities laws. These statements are subject to numerous risks and uncertainties, many of which are beyond the company's control that could cause actual results to differ materially from the results expressed or implied by the statements. These risks and uncertainties include, but are not limited to: uncertainty, delays or reductions in government funding, appropriations and payments, including as a result of continuing resolution funding mechanisms, government shutdowns or changing budget priorities;  the ongoing conflict between Russia and Ukraine and the related impacts on our business as we continue to carry out efforts to wind down operations in Russia; potential adverse economic and market conditions, such as interest rate and currency exchange rate fluctuations, the company's ability to manage its liquidity; the outcome of and the publicity surrounding audits and investigations by domestic and foreign government agencies and legislative bodies; potential adverse proceedings by such agencies and potential adverse results and consequences from such proceedings; changes in capital spending by the company's customers; the company's ability to obtain contracts from existing and new customers and perform under those contracts; structural changes in the industries in which the company operates; escalating costs associated with and the performance of fixed-fee projects and the company's ability to control its cost under its contracts; claims negotiations and contract disputes with the company's customers; changes in the demand for or price of oil and/or natural gas; protection of intellectual property rights; compliance with environmental laws; changes in government regulations and regulatory requirements; compliance with laws related to income taxes; unsettled political conditions, war and the effects of terrorism; foreign operations and foreign exchange rates and controls; the development and installation of financial systems; the possibility of cyber and malware attacks; increased competition for employees; the ability to successfully complete and integrate acquisitions; and operations of joint ventures, including joint ventures that are not controlled by the company.

The company's most recently filed Annual Report on Form 10-K, any subsequent Form 10-Qs and 8-Ks, and other U.S. Securities and Exchange Commission filings discuss some of the important risk factors that the company has identified that may affect its business, results of operations and financial condition. Except as required by law, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Government Solutions backlog and options for the quarter ended June 30, 2023 totaled $16.0 billion, up $0.3 billion compared to December 31, 2022. Sustainable Technology Solutions backlog for the quarter ended June 30, 2023 totaled $5.1 billion, up $1.0 billion compared to December 31, 2022.

Non-GAAP Financial Information
The following information provides reconciliations of certain non-GAAP financial measures presented in the press release to which this reconciliation is attached to the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles (GAAP). The company has provided the non-GAAP financial information presented in the press release as information supplemental and in addition to the financial measures presented in the press release that are calculated and presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for or alternative to, and should be considered in conjunction with, the GAAP financial measures presented in the press release. The non-GAAP financial measures in the press release may differ from similar measures used by other companies.

EBITDA and Adjusted EBITDA
We evaluate performance based on EBITDA and Adjusted EBITDA. EBITDA is defined as Net income (loss) attributable to KBR, plus interest expense; charges associated with Convertible Notes; other non-operating expense; provision for income taxes; and depreciation and amortization. Adjusted EBITDA excludes certain amounts included in EBITDA. EBITDA and Adjusted EBITDA for each of the three- and six-month periods ended June 30, 2023 and 2022 are considered non-GAAP financial measures under SEC rules because EBITDA and Adjusted EBITDA exclude certain amounts included in the calculation of net income (loss) attributable to KBR in accordance with GAAP for such periods. Management believes EBITDA and Adjusted EBITDA afford investors a view of what management considers KBR's core performance for each of the three- and six-month periods ended June 30, 2023 and 2022 and also affords investors the ability to make a more informed assessment of such core performance for the comparable periods.

Adjusted EPS
Adjusted earnings per share (Adjusted EPS) for each of the three- and six-month periods ended  June 30, 2023 and 2022 is considered a non-GAAP financial measure under SEC rules because Adjusted EPS excludes certain amounts included in the Diluted EPS calculated in accordance with GAAP for such periods. The most directly comparable financial measure calculated in accordance with GAAP is Diluted EPS for the same periods. Management believes that Adjusted EPS affords investors a view of what management considers KBR's core earnings performance for each of the three- and six-month periods ended June 30, 2023 and 2022 and also affords investors the ability to make a more informed assessment of such core earnings performance for the comparable periods.

We have calculated Adjusted EPS for each of the three- and six-month periods ended  June 30, 2023 and 2022 by adjusting Diluted EPS for the items included in the table below.

Adjusted Cash Flows Provided by Operating Activities and Adjusted Free Cash Flows

Adjusted operating cash flows and Adjusted free cash flows are considered non-GAAP financial measures under SEC rules.  Adjusted operating cash flows exclude certain amounts included in the cash flows provided by operating activities calculated in accordance with GAAP. Adjusted free cash flows exclude capital expenditures from Adjusted operating cash flows. The most directly comparable financial measure calculated in accordance with GAAP is cash flows provided by operating activities. Management believes that Adjusted operating cash flows and Adjusted free cash flows afford investors a view of what management considers KBR's core operating cash flow performance and also afford investors the ability to make a more informed assessment of such core operating cash generation performance.

We have calculated Adjusted operating cash flows and Adjusted free cash flows for each of the three- and six-month periods ended June 30, 2023 and 2022 by adjusting operating cash flow provided by operating activities for items included in the table below.

Revenue ex-OAW 

Adjusted EBITDA and Adjusted EPS ex-Gains

Adjusted Net Income Attributable to KBR

SOURCE KBR, Inc.

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