KBR

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

KBR, Inc. is a global provider of science, technology, and engineering solutions, primarily serving government and energy sectors with a focus on project management, infrastructure, and sustainability.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

KBR operates across various segments with a wide range of offerings:

  • Government Solutions: This segment provides a suite of services and products to governmental entities, most notably the U.S. Government including the DoD, NASA, and the Intelligence community. This includes technical solutions in defense, aerospace, cybersecurity, intelligence gathering, and logistics.
  • Sustainable Technology Solutions: This area centers on lifecycle engineering, energy transitions, decarbonization and chemical industry solutions.
  • Other: This includes operating expenses and all other administrative and general expenses not allocated to the first two segments.

Industry Trends:

  • Government Spending: There is a high reliance on U.S. government contracts, which means the firm is exposed to any changes or political headwinds that affect the sector.
  • Shift to Sustainable Technology: Increasing global focus on sustainability and renewable energy drives demand for low-carbon energy transition products.
  • Infrastructure Spending: The need to modernize aging infrastructure globally, especially in developed nations, offers long-term growth opportunities.

Competitive Landscape

KBR operates in a competitive landscape with a variety of specialized players:

  • Government Solutions: In this segment, competition comes from large, established players as well as specialized contractors that have an in-depth knowledge about the processes and the government. Competition is fierce, and contract wins often depend on relationships, expertise, and pricing.
  • Sustainable Technology Solutions: In this sector, a wide range of companies are involved in engineering, consulting, and technology solutions; the landscape is highly fragmented and competitive.
  • Pricing and Profitability: KBR operates in a project-based environment, the pricing and terms of the contract are usually the results of competitive negotiations, thus, profit margins are susceptible to volatile circumstances, pricing pressure, or the project completion efficiency.

What Makes KBR Different?

  • Decades of Experience: KBR is an old company that has over 100 years of experience.
  • Large Portfolio: KBR has a diverse portfolio of services and sectors they operate in, which makes them more resilient.
  • Government Expertise: The company has a reputation of working with governments on complex high level projects, creating long-term relationships, which provides it a good advantage.

Moat Assessment

Rating: 2/5

KBR’s economic moat is not strong, but exists mainly due to its relationships and long-term contracts, especially within the government sector, and the engineering expertise that allows it to win big complex projects. Here’s a deeper look:

  1. Intangible Assets: While KBR has a recognized brand and some patented processes, these do not function as a strong, unique identifier or driver of customer lock-in. They have some proprietary technologies in a few areas, but it is not their focus.
  2. Switching Costs: While the work that KBR does is critical and can’t be changed easily from supplier to supplier, their switching costs are not high as the company provides services, and the client can usually find a similar company, albeit with more difficulty, to perform their work. The switching costs are present but not high.
  3. Network Effects: The company’s projects do not usually benefit from any strong network effects.
  4. Cost Advantages: The company is not focused on low-cost operations and does not have a sustainable cost advantage.

This assessment leads to a weak-moat rating, meaning that although the company may have some advantage it is not durable.

Risks to the Moat and Business Resilience

  • Government Spending Variability: KBR is highly reliant on government contracts, especially those from the U.S. government which represent a major part of their revenue. Therefore, changes in budget priorities, political factors, or spending cuts could significantly impact KBR’s earnings.
  • Project Delays: Cost overruns, schedule changes, delays and project cancelations can reduce overall profitability.
  • Operational Risks: The company’s revenue is dependent on its ability to effectively manage complex large projects. If execution falls through, it can have a major impact on the profitability of the business.
  • Competition: The markets that the company operate in are very competitive and could push their prices down, impacting margins and profitability.
  • Technological Disruption: Rapid technology advances in all the sectors the company operate in may change market dynamics very quickly and impair the company’s economic moat.

Despite these risks, KBR has shown some resilience through its extensive portfolio of services, by offering solutions to the most important market sectors, and by having a history of working with governments on high-level, critical projects.

Financial Analysis

KBR’s financials have undergone major improvements in the recent years with a trend of increased profitability and improved cash flow. KBR’s Q2 2023 showed impressive earnings in both their business units, also reporting its strongest Q2 backlog in several years. In Q2 2023, revenue increased by 9% year-over-year to $1.69 billion.

  • Profitability:
    • Gross profits increased to $195 million from $164 million.
    • Net Income attributable to KBR grew 143% over Q2 of the previous year.
    • Adjusted EBITDA grew to $121 million vs. $103 million.
  • Balance Sheet: KBR has a respectable $711 million in cash on hand, which gives the company a good amount of financial flexibility.
  • Liquidity: With a current ratio of 1.6, KBR’s liquidity seems to be adequate, and the current liquidity to current debt is more than adequate.
  • Debt: KBR’s long-term debt is $1.67 billion, which is reasonable given the company’s market capitalization.
  • Cash flow: The company has shown healthy operating cash flows in recent years, due to a focused approach to operating efficiency.
  • Share Repurchases: KBR has been actively repurchasing its own shares, which is a good sign for shareholders.

Overall: KBR has a stable financial position with improvements in profitability, revenue, and cash flow. There is room for improvement on debt levels, especially in the longer term, but that can be achieved with KBR’s projected growth.

Understandability

Rating: 3 / 5

KBR’s business model involves a diverse range of complex projects and solutions, especially in the technology and government services segment, which may be difficult for some to understand. Analyzing project-based financials and understanding each of their segment dynamics may also be a bit challenging. However, the basic concept of providing solutions to governments and companies in various areas that need it is very easy to understand, and the company does provide the basic segmentation of the business.

Balance Sheet Health

Rating: 4 / 5

KBR shows to have a healthy balance sheet, showing a healthy level of cash on hand, with adequate liquidity ratios. The only concern may be debt levels, which while manageable, should be a point of focus. Overall, the company has shown to have improved its financial performance and this coupled with the high financial flexibility gives the business a 4 rating.

Recent Concerns and Management Discussion

KBR has experienced some issues with their projects, especially in terms of cost overruns and delays, the most significant of them being the “Joint Base San Antonio - Randolph” project. However, KBR was able to settle these claims for a fixed amount. A significant concern has also been the delay of the project and their inability to deliver on time, which is a result of the global supply chain and personnel issues. KBR management acknowledges these problems and is working to resolve them.

In the latest earnings calls, the management focused on several positive takeaways. Management expressed confidence in the company’s ability to grow their earnings in the future, citing a favorable market environment for their services. KBR also expects that by 2025, 50% of their revenue will come from more sustainable solutions.

Management is also looking to cut costs and improve efficiency going forward. They plan to achieve that through improved supply chain efficiency and digital transformation initiatives.

They also expressed confidence in their project backlog, and also reiterated that the company would achieve a 25% growth in adjusted EPS year-over-year.

Overall, the company seems to be in a transition phase in terms of its financials, but it is looking to be in a good position to tackle any future problems.