enterprise

KBR (KBR) Q1 2019 Earnings Call Transcript – The Motley Fool


Logo of jester cap with thought bubble.

Image source: The Motley Fool.

KBR (NYSE:KBR)
Q1 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to today’s KBR, Inc. first-quarter 2019 earnings conference call. This call is being recorded. [Operator instructions] For opening remarks and introductions, I would now like to turn the call over to Ms.

Alison Vasquez. Please go ahead, ma’am.

Alison Vasquez

Good morning, and thank you for attending KBR’s first-quarter 2019 earnings call. Joining us today are Stuart Bradie, president and chief executive officer; and Mark Sopp, executive vice president and chief financial officer. Stuart and Mark will discuss highlights from the quarter, our market outlook and financial results. After these remarks, we will open the call for questions.

Today’s presentation is available on the investors section of our website at kbr.com. I would like to remind you that this discussion may include forward-looking statements reflecting KBR’s views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in our most recent 10-K available on our website.

I’ll now turn the call over to Stuart.

Stuart Bradie

Thank you, Alison. Good morning, and thank you for joining us. I will start on Slide 4 as it were on health, safety, security and the environment. The graph really show that we continue to perform.

Our core culture of looking after oneself and those around us is driving this performance. I would like to personally thank all the people at KBR for their continued vigilance and passion around this subject. On to Slide 5, Q1 highlights. Combined with the recently announced LOGCAP V win and also the GICS code change, I’m pleased to report that the new KBR has really come out the block strongly in 2019 with our Q1 results.

We are of course building on the growth and momentum from ’17 through 2018, and this is actually the ninth consecutive quarter where we have met or exceeded expectation. Overall revenue was up 29% from this time last year. The growth was delivered in our government-facing business and in technology. technology growth of 48% was all organic, granted over a slow start in Q1 last year but still an outstanding result.

government growth was 44% overall, but this did include impact of the SGT acquisition, which closed in April 2018. So going forward, year-on-year growth will be essentially organic. The organic growth in the quarter for government was 22%, which did include continuing upside from the emergency relief work at Tyndall Air Force Base. This work is now ramping down as expected.

Excluding Tyndall, organic growth was at terrific levels in the low teens. This is the fifth consecutive quarter in double digits and industry-leading in its own right. Margin performance in the quarter was very pleasing especially considering the technology business had a heavier propriety equipment mix and the emergency relief work in government solutions was at lower-than-normative average margins as you’d expect. Aside of these, all the businesses performed at or above expectation on the margin front.

This all combined to deliver adjusted EBITDA growth of 15%. We’re also very pleased with our strong operational cash performance. As you can see, we were positive and in line with annualized expectations, quite a difference from 2018, which reflects our efforts to better manage cash. We remain well on track to deliver our full-year 2019 cash guidance.

On the bookings front, our overall book-to-bill was 1.1 excluding the PFI work-off. Both government and technology have typical seasonally lower bookings in Q1, but obviously the big news in our government business was in the win on LOGCAP V. This will help our backlog later in the year subject to protests, etc. The highlight in Q1 backlog growth was actually in lower energy-facing business with a book-to-bill of 2.4.

We are seeing increasing bookings momentum and have already announced a number of key wins in Q2. On to Slide 6 and market outlook. Following on from our strategy sessions in 2018, it became clear that where KBR was heading and what our customers were asking for was converging across all of our segments. This was essentially deep domain knowledge coupled with increasing digitalization and broader procurement bundling to deliver complete solutions.

To recognize this shift and to align with customer needs, we are renaming our segments appropriately to government solutions, technology solutions and energy solutions. We will of course explore this further and highlight the increasing synergy across segments as a consequence at our investor day this Friday. We will also discuss the markets in a bit more detail on the third. But at a high level, we continue to experience point and market conditions across all of our segments.

Growing backlog and recently announced wins in all three segments support this. Strategically, we are positioned for attractive rates of growth in each of our three business segments which underpins the level of excitement and the momentum we’re seeing around the halls of KBR these days. On to Slide 7. We thought it’s prudent to give a bit more detail on LOGCAP V and what these recently announced awards could mean to KBR.

The LOGCAP V win clearly removes an element of uncertainty for the years ahead, plus has meaningful upside. Given the complexity of the transition, we do not expect any material impact in 2019, and thus our previous guidance holds. KBR has secured to three of the seven major contracts that will be intended, including the large and challenging Afghanistan area of responsibility. I will remind you that no one company was allowed to win CENTCOM and Afghanistan due to their scale and complexity.

Today, two companies support Afghanistan. This will all move to KBR as we transition off our current work in the CENTCOM area. We have retained the European command and added the Northern command. The areas are shown on the map.

The public data on historical spend across each region is shown in the table, which gives a feel for the upside potential. Importantly, the strategic positioning in EUCOM and NORTHCOM around training and readiness is critical. And it is worth noting NORTHCOM includes the Arctic and emergency disaster support. One other key point to note is that LOGCAP V includes a far larger training and readiness scope.

This is funded from O&M budgets rather than from the traditional contingency budgets. This of course leads to greater stability, funding assurance and, thus, predictability. This all reconfirms KBR as the market leader in logistics services and underpins our position for the next 10 years. I will now pass over to Mark to give more detail on the financials.

Mark Sopp

Great. Thank you, Stuart, and I will pick it up on Slide 9. As Stuart already covered, we started 2019 really well with good financial performance, contract wins and new business pipeline progress that bodes well for the outlook for the rest of the year. Progress in government and Tech Solutions segments coupled with stability in energy solutions yielded top-line growth of almost 30% year over year.

Higher revenues coupled with good overall margins were the driving force, with 15% adjusted EBITDA growth year over year. You’ll note equity in earnings dropped from 2018 levels, but this should normally be in the $10 million to 15 million range per quarter. Last year saw an unusually high result, whereas this quarter it’s 0. The reduction was driven by a decision to exit a long-term joint venture in Latin America, and this is primarily evidenced with the one-off non-cash impairment charge of that investment.

We also had a net charge from legal matters on this LNG project embodied in equity in earnings. The main message in Ichthys, however, is that we remain fully on track. As we told you in February, mechanical completion is behind us and we still expect to turn over the power plant in late Q2, early Q3 of this year. We have de-manned the site and only have a small commissioning crew in place today.

Our estimated cost to complete the power plant has not changed and our $500 million cash estimate to complete project execution is also unchanged. Of that estimate, a little more than $400 million has already been funded to date, but the end of that cash outflow is accordingly near. All of the matters in the P&L were pretty much as expected. Adjusted earnings per share came in at $0.36.

That’s up 6% over last year on higher revenues, good margins and offset somewhat by the equity in earnings and higher interest. We’re really pleased with the operating cash flow result of almost $50 million in what is usually a soft first quarter. Focus and rigor across the team has been good and there is certainly no plan to change any of that. Now on to Slide 10 for some takeaways on our performance by segment.

The government solutions segment continued its streak with the fifth straight quarter of double-digit growth, as Stuart mentioned earlier. And that excludes the effect of the ongoing work at Tyndall Air Force Base, which contributed 9 percentage points of the total 22% organic rate. That will be 13% organic rate without Tyndall. As Stuart said, margins were a little off as the emergency work we are doing at that Air Force Base understandably comes at a lower fee.

Strong cash collection in government solutions helped drive the overall cash result as well. We’re really pleased with that. technology also continued its stellar organic growth performance at 48%. Revenues were aided by higher proportion of proprietary equipment sales.

Now that did bump down of the margin a bit, but we expect to remain on track with our targets in margins for this segment for 2019 as the future quarters unwind. technology also helped the overall cash result with continued excellent conversion. It’s good to see energy solutions have stabilized in revenue over the past few quarters. With a Q1 book-to-bill of 2.4, recent announcements, strong pipeline and improving market conditions, we anticipate project wins will start moving the needle for sequential growth in the second half.

On to Slide 11. Not a lot of change on the capital structure side, although we would note the ongoing deleveraging we’ve seen with gross debt-to-EBITDA now being reduced to 3.1. We’ve seen this consistently come down over the past few quarters. With Ichthys funding coming to an end soon, we are increasingly confident we will commence gross debt reductions in the second half.

This, coupled with ongoing EBITDA growth, should advance our deleveraging to below three this fiscal year and also pave way for expanded capital deployments next year as we’ve consistently messaged. And on to Slide 12. It’s been a good start for 2019, and we’re reaffirming our guidance of $1.58 to $1.73 for adjusted EPS and operating cash flow at $175 million to $205 million range. With that, I’ll turn it back over to Stuart to close up our remarks.

Stuart Bradie

Thanks, Mark. And on to Slide 13 for some final thoughts and some key takeaways.Already 2019 has been a busy year for KBR. A change of GICS code that better reflects the transformation that KBR has undergone, a change in our segment names to align with our customer needs and on the back of the momentum we’ve built in ’17 and the strong growth we generated in 2018, our start to 2019 has been terrific. Cash is an enormous focus, and we continue to see the fruits of our labor.

Our end markets remain on point, and we are well positioned in attractive submarkets. Our backlog has increased in Q1 with a standard being energy solutions delivering a book-to-bill well above 2. Recent announcements across all of our segments, including LOGCAP V of course in 2019 and beyond, are shaping up to continue our value and growth story. And with the reminder that investor conference is in New York at the Stock Exchange on Friday the 3rd of May, so this Friday, I will hand it back to the operator who will open the call up for questions.

Thank you.

Questions & Answers:

Operator

[Operator instructions] We will take our first question from Tahira Afzal from KeyBanc. Please go ahead. Your line is open.

Tahira Afzal

Thank you, and congrats on a better quarter again.

Stuart Bradie

Thank you, Tahira.

Tahira Afzal

First question is, Stuart, it seems, even based on your slides and the update that Ichthys is essentially in handover phase at this point. Stuart, any update on time line for final settlements with the owner?

Stuart Bradie

So you’re quite right, we are sort of at the — moving into what I would call the settlement phase, if you like. The — we’ve got to get to the next couple of months and hand over the power station and therefore the full facility, and get to that performance test. I think then the conversation will probably change in terms of the facility working to spec and producing at the levels it should be in under. But other than that, Tahira, no.

I think we’re optimistic that we will start to get a different dialogue once the facility is handed over. But I can’t guarantee that.

Tahira Afzal

Got it. OK. And second question is really in regards to a lot of the big LNG projects that we keep seeing on the map. Stuart, is there any the update that these are, for you, more a second half opportunity seems to jive with the FID date.

But just wanted to make sure there was no sort of change in timing or any slippages over there.

Stuart Bradie

No, we’re not hearing anything about slippages. And I think — yes, I think what we said last quarter still holds. The main opportunities that we’re looking at we’ll know before then of course, but the FIDs themselves will be in the second half of the year.

Tahira Afzal

Got it. Thank you very much, folks.

Stuart Bradie

Thank you.

Operator

[Operator instructions] We will take our next question from Brent Thielman from D. A. Davidson. Please go ahead. 

Brent Thielman

Thanks. Good morning. Great quarter.

Stuart Bradie

Thank you. Thank you.

Brent Thielman

Stuart or Mark, any update on maybe some of the other important recompetes you’re looking to secure this year in government?

Stuart Bradie

Yes. So I think the major recompete we were worried about was LOGCAP V. We felt pretty well placed but you’ll never know until the music stops. And I think obviously we’re very, very pleased with the outcome there.

I think it removes a lot of uncertainty in terms of our future and underpins, I guess, where we’re going in the next 10 years. In terms of other recompetes, this one in — for the Marines where we do the preposition stock, that’s really the major one this year and not last year. We’ll award any day now. We’re feeling really good about that, our recompete sort of win rate is very, very high, on the high 90s.

And so we’ve had pretty good past performance there. We’re feeling really good about the level of dialogue with the customer, and we’ll hopefully be announcing that over the next month or so, and that would be the only major recompete left this year.

Brent Thielman

OK, that’s great. And then the — on energy solutions, the capex projects, those Methanex and the chemicals project you referenced on last quarter’s call that were expected to FID in the second quarter, are those still on target for this quarter?

Stuart Bradie

Yes. The methanol project, I think there was quite a lot of debate around that. I think from an activist-investor and things like that, nothing with us and their stock. But I think that’s all behind them now and so they’re moving ahead.

So we’re feeling pretty upbeat that that’s going to FID as expected in the second half of the year. And there’s lots that happening in the downstream sector across the Permian and really just the chemicals market in general. So we’re — again, we’re feeling that those will move ahead and hopefully we’ll be making some positive announcements over the next bit of while on those. So we’re feeling really good about the energy solutions market both in the services side.

We’ve had good growth there. And we’re winning a lot of work in that arena, which is fantastic. And we’re bidding a lot of maintenance contracts and things like that that we’re feeling pretty good about and hopefully they’ll come to fruition in the next bit of while. And then on the big capex stuff, things like Methanex, we’ve talked about before, and in terms of methanol.

And we are looking pretty good, as I said, and things that are happening in the Permian and around the downstream sector in general, and then you layer on the LNG. So I do think that we’re pretty well positioned, as Mark said, to start to see sequential growth tick up in the second half of the year.

Brent Thielman

OK. Great. Thank you.

Stuart Bradie

Thanks, buddy.

Operator

Thank you. We can take our next question from Lucy Guo from Cowen and Company. Please go ahead. Your line is open.

Lucy Guo

Thank you. Good morning, Stuart and Mark. Good revenue. 

Stuart Bradie

Good morning, Lucy.

Mark Sopp

Good morning, Lucy.

Lucy Guo

Hi. Following up on the last question on Energy bookings. Was there any pull forward into Q1 just given the strong book-to-bill?

Stuart Bradie

Absolutely not. I mean no, we’re very — we’ve got a very strict, I guess, bookings policy. We only book work when it’s signed. We only book it on the quarter it’s signed.

There’s absolute clarity about that within KBR. So yeah, no pull forward. No, no…

Lucy Guo

Yeah. Just in terms of your expected timing of certain projects may have come in earlier than you had planned.

Stuart Bradie

No. No.

Lucy Guo

OK. And is your — so you mentioned you’re already seeing a few key wins in Q2. Methanex sounds like one of them. Is Arkema or anything else that you can point to in — that’s expected for Q2?

Stuart Bradie

So the methanol project you mentioned, we won some time ago both the feed and EPC, which is reimbursable. We’re just waiting for FID to move into the next phase, which is in the second half of the year. As I said earlier on this call, we’ve got a number of things that we think are coming to a conclusion aside of LNG in the next — in this quarter and we’ll be announcing them as we go forward. So I can say we’re feeling really good about the energy solutions market.

And if you add on an LNG project on top of that, it’s — the growth can be absolutely stellar going forward.

Lucy Guo

One more if I may on the government side which is — it seems Tyndall was roughly $80 million in the first quarter, and can you just talk a little bit about how that may fall off for the rest of the year? And was there anything onetime that was potentially a margin item just in general EBITDA margin on the strong volume growth was down more year over year than I had estimated?

Stuart Bradie

Yeah. So volume is probably above what you estimated because Tyndall ran on a bit longer than we — I think we all expected. And — but the margins associated with relief, emergency relief work, are quite likely lower. So that volume comes at a lower margin, which puts a little bit pressure on the margins.

But that work is now ramping down. And as Mark and I both alluded, I think the underlying organic growth, excluding Tyndall, was in the low teens at 13%. So I think that brings it back to sort of the levels excluding Tyndall on an organic basis, and it will return to normative margins next quarter as that work starts to ramp down.

Lucy Guo

Thank you. I’ll pass it on.

Stuart Bradie

Thank you.

Operator

Thank you. We can take our next question from Steve Fisher from UBS. Please go ahead. Your line is open.

Steve Fisher

Hi. Thanks, guys. Congratulations.

Stuart Bradie

Thanks, Steve.

Steve Fisher

Cash flow was nicely positive and a good start to the year. Just curious how much of that $175 million to $205 million cash flow do you think you could have available for buybacks and debt reduction. I think you said second half of the year, Mark, would be debt reduction. But I just wasn’t sure if you consider the Ichthys outflows as an offset to that cash flow or if you consider that separately since it’s already funded by the debt.

And then related, when do you expect that cash flow related to Ichthys to kind of fully go away?

Mark Sopp

The flows related to Ichthys will probably bleed into the third quarter. And I hope and expect it should be done by then. So it will be noticeable in Q2 and I think it will be less noticeable in Q3, and probably not at all in Q4, I would say. And relative to the free cash flow this year, the operating cash flow, we do have a shot at maybe as much as $50 million marked toward debt reduction this year because we have, as you appropriately said, some excess cash on the balance sheet to fund some of that Ichthys component.

So priorities are very clear. We got to meet our obligation for Ichthys. We expect delever to the sub-three area both through EBITDA growth and direct debt reductions, and I do expect to have some of that happening in the second half, probably more in the fourth quarter.

Stuart Bradie

And I think, Steve, it’s also worth noting that as we typically do, we’ve been prudent in terms of our guidance in the way that we think about the business in general but also in cash. There are no recoveries at all baked into those numbers either from ongoing settlement discussions with the U.S. government and historical issues as well as any recoveries obviously through Ichthys and any other commercial ongoing negotiations. So I think it’s a very prudent position as we’ve laid out and kind of think really a very sort of positive place for KBR to be from a cash perspective.

Steve Fisher

Great. And then I imagine you’re going to talk a little bit about the strategy on Friday, but just curious what the pipeline of M&A potential looks like in government business at the moment and kind of how actively you’re looking at deals coming through.

Stuart Bradie

I think we’re very clear that our priorities at the moment are to delever. We’ve got amazing opportunity in terms of the growth in front of us that we’ll present on Friday without having to do anything from an M&A perspective. But that said, we’ve done very well acquisitively in the past. I think our approach to acquisitions has proven that we only work hard at the cultural integration piece and we’ve not seen any degradation in volume in anything that we’ve done.

In fact, a complete opposite. We’ve actually outperformed in the synergy side. So we’re always looking, Steve. We talked about kissing a lot of frogs in the past and that continues.

But I think we’ve been very clear about our priorities and we’ve been very clear that we want to delever. And we don’t need to do M&A to transform the business. We’ve done that and we don’t need to do M&A to outpace growth in the industry. We’re doing it.

And I think we’ve got backlog to continue that growth without having to put the company at — in any way sort of overstressed management-wise in terms of integration charges and things like that.

Steve Fisher

Thanks very much.

Operator

Thank you. We can take our next question from Michael Dudas from Vertical Research. Please go ahead. Your line is open.

Michael Dudas

Good morning, gentleman and Alison.

Alison Vasquez

Good morning, Mike.

Stuart Bradie

Good morning, Mike.

Mark Sopp

Good morning, Mike.

Michael Dudas

The — on government services, can you maybe elaborate a little bit on — the growth has been terrific and industry-leading for the last several quarters. Maybe on the mix of where it came from, from funding or department sources and anything unusual. And is that type of trend still kind of look reasonable given the setup on awards ahead of you guys?

Stuart Bradie

Yes. It’s a really good question, Mike, and that it’s something we’re quite excited about. We’ll explore it a bit more obviously on Friday. But one of the areas where we’ve really seen significant growth is actually in the engineering side of our business.

With a lot of cool stuff in there. And we probably don’t talk about it enough in truth because everyone is consumed with things like LOGCAP and maybe rightfully so just given the scale. But our growth in our engineering business and our science businesses have been absolutely terrific. And they typically are funded through RDT&E obviously.

We’ve done very well, I think, in our logistics business, and there’s a strong mix of O&M funding and obviously some contingency funding supporting what we’re doing in CENTCOM at the moment. And I think going forward, we’ve talked about sort of bids for NASA and where we sit with those. So really it’s a cross-section. I think that the important thing for us is that the government spending in those areas is highly attractive and we feel that we’re very well positioned in those markets to continue that growth.

I would also say that our performance continue to do really well internationally. The performance on the PFI contracts is stellar. And aside of that, we’re winning quite a bit of work and growing in different directions and I think we’re realizing synergy being brought from the U.S. into places like the U.K.

And we’ll talk again a little bit more about that on Friday and give you a little bit more color. But it’s a really good time in terms of not just the business and it’s growing but actually the future, the access, the multiple funding sources. And as you know, that was a key part of our strategic build-out in the past.

Michael Dudas

[Inaudible] Stuart, look forward and see you on Friday. Thank you.

Stuart Bradie

Thanks, Mike.

Operator

Thank you. We can take our next question from Andrew Kaplowitz from Citi. Please go ahead. Your line is open.

Unknown speaker

This is Aton Bookbinder on for Andy. 

Stuart Bradie

Good morning.

Unknown speaker

Good morning. The quarter had organic growth of 48% in technology solutions, and we know the investor day is coming up shortly and you’ve talked about 7% to 10% CAGR in technology in the past. So was that making too much of one quarter? Is technology on a path to grow double digits or at the high end of that range going forward? And what’s the biggest change that allowed technology to grow at this pace?

Stuart Bradie

So yeah, I think we laid out in 2017 that we’ve grown our business 7% to 10%, and it actually outperformed. Over the last 10 years, we actually look back over 10 years, and we’ve talked about this before, it’s CAGR is in the low teens. So regardless of economic strife across the world, our businesses just kept on going forward and growing. I think one of the key — there’s a lot of good things going on in technology, it’s a little bit of a perfect storm.

We’ve got things like IMO 2020 driving a lot of opportunity for our ROSE technology. We’ve got obviously a bouyant downstream sort of gas monetization market that really is driving a lot of opportunities for things like ethane and other technologies. And excitingly, we’ve got new technologies that are coming to market that we’re getting into the phase where we’ve got the first commercial scale plant working very well in China today and we’re able to use that as a reference site, and then go back and retrofit a number of facilities across the U.S. and other places…

Mark Sopp

For the K-SAAT technology.

Stuart Bradie

For the K-SAAT technology, yes. So that’s an exciting time. So I think there’s lots of things happening. There’s strong momentum in the market.

I think our technologies fit those dynamics in the market very well. We’ve got continued investment in the development of those technologies. And we’ll talk a lot more about that on Friday as to how we do that, where we do it and what we see the future might be. So I do think that the strong growth is going to continue in technology, and again, we’ll talk more about that as we set out our targets on Friday.

Unknown speaker

Thanks. And as a follow-up, we’ve seen an increase in oil and it seems China trade relations are starting to — maybe wrapping up in the coming months, if not weeks. Have you seen customers coming back to the table in the last few months? And has the cadence of the order growth improved from the beginning of the year to where we are now? Thank you.

Stuart Bradie

So there’s been certainly positive sentiment across the market because of the China trade negotiations hopefully concluding, as you rightfully say, in the next bit of while. Certainly, the LNG supply demand piece hasn’t changed at all, we’re still seeing a lot of activity in that marketplace. One of the things we are seeing which is increasingly evident is quite a lot of NOCs investing in the U.S. to get a slice of the action around the gas market.

SABIC and Aramco, etc., are sort of good examples of that, but there’s a number of them. And I think for us that’s terrific because we’ve got very strong relationships for the work we’ve done. And using those, too, as an example in Saudi Arabia, it’s very well. They know our skills around the project execution and that we say — we do what we say we’re going to doing and that really plays well when we come to the U.S.

So we are seeing heightened momentum in that market. I think our book-to-bill of 2.4 in the quarter clearly demonstrates that. And I think we’ve been quite clear on this call and Mark’s remarks earlier that we expect that to continue and we expect to see sequential growth coming in the second half in our energy solutions business. So it’s good times.

Unknown speaker

Thank you.

Operator

Thank you. We can take our next question from Chad Dillard from Deutsche Bank. Please go ahead. Your line is open.

Chad Dillard

Hi. Good morning, everyone.

Mark Sopp

Hey, Chad.

Stuart Bradie

Hey, Chad.

Chad Dillard

So just a question for you guys on energy solutions. You guys called out that there was an excess [Inaudible] I was hoping you guys could quantify that and talk about whether there’s any cash impact related to that or any change in the — on the liquid change orders? And then also the hydrocarbons services margins were up pretty nicely in the quarter. So I just wanted to understand whether there was any onetime event to contemplate there?

Stuart Bradie

Sorry, we didn’t hear the first part of your question, Chad. Was it related to the venture in Latin America?

Chad Dillard

It was the Ichthys settlement.

Stuart Bradie

Well, yeah. I know that, yeah.

Chad Dillard

Just wanted to know how much it was in terms of cash?

Stuart Bradie

Yeah. So in terms of cash, Mark was very clear that our target for cash of $500 million still remains intact. And we’re getting very close to the end, so we’re very confident around that number. So no real cash outflow there.

And in terms of the equity in earnings sort of performance this quarter, the majority of that was actually impacted by what we — our decision to get out of the venture in Latin America. The one we’ve been in — I think it was — it came across as we spun out of Halliburton many, many years ago. So it’s a very sort of old joint venture and we decided that it didn’t fit with where we were going strategically and with this part of new KBR, so we decided to exit it. And we had obviously some balance sheet to address there so most of that was related to a non-cash impairment of that investment.

So that’s really the story around that. In terms of margins in the quarter, Mark, you…

Mark Sopp

Sure. Well, we tend to look at margins including equity in earnings on a segment basis, and that was actually low due to the reasons that Stuart just mentioned on Latin America and, to a lesser degree, Ichthys. But there was favorably a little pickup on closing out a lump-sum project in the first quarter in that segment. This was the only lump-sum contract undertaken since 2014, and it successfully sailed away in the first quarter.

So there was this single-digit sort of number, but it did conclude that project nicely and so that did hit the gross margin a little favorably. But again, it was offset at the end of the day with the equity in earnings result if you look at the total segment.

Chad Dillard

Got it. And then just back to LOGCAP, how should we think about the margin profile of that one relative to what you guys are doing in LOGCAP IV?

Stuart Bradie

Yeah. I don’t think we’ve really sort of disclosed the margins associated with LOGCAP IV. So that’s a — but it’s a good question in the sense directionally. I think the way to think about it that this is the best value procurement.

We felt that we were pretty strong in — particularly in the big areas just because of our capability to do these big complex theaters. So I think you should put it in that context. Certainly, we’re not — we don’t believe there’ll be a degradation in margin at all and that there may be an opportunity to do a little bit better. I think the big piece for us of course is across the piece we do think there’s revenue upside potential because we’ve got three of the seven regions.

We think, strategically, we’re very well placed particularly in our NORTHCOM and EUCOM, and particularly around readiness and capability, setting capability and — for the Army. And as we said before, this is funded from O&M. And that’s a big shift and that should not be underestimated in terms of the predictability that gives in terms of funding assurance. So I think all that — I think no degradation in margins, maybe potential for upside.

And then beyond that, I think we’re really looking at growth in volume and be very well placed strategically with more assurance about the future. 

Chad Dillard

Great. Thanks, guys.

Operator

Thank yo. We can now take our next question from Jerry Revich from Goldman Sachs. Please go ahead.

Jerry Revich

Yes, hi. Good morning, everyone. Can we just continue the LOGCAP discussion? Congratulations on the win. I’m wondering if you can comment on — relative to the program size as you laid out or task orders on Slide 7, can you talk about directionally how 2019 task orders are expected to shape up relative to the actual numbers in 2018.

And as we think about modeling your business in 2020, what’s the cadence of the transition to LOGCAP V as we think about effectively doubling your addressable market and how quickly does that ramp?

Stuart Bradie

Yes. I mean, we don’t know how ’19 is shaping up. And yes, I mean what we would put there is really publicly available data that the government publishes. That’s a — it really is to give a feel for what could be possible in terms of what task orders are actually issued and how that comes to fruition.

It’s difficult to assess that accurately today. But I do think the upside potential is clear, and we’ll obviously disclose more as we move forward. In terms of transition, I mean, I think it’s probably well known now publicly. One of the bidders did protest and that’s a 90-day process under the rules to come through that.

So for us, ’19 is going to be as is. I think we’ll continue to do our work in CENTCOM and what we’re doing in that EUCOM through the course of this year, and we’ll start to see the transition in the early part of 2020, maybe late ’19 at the earliest. And then we’ll start to see that ramp-up happen progressively through 2020 and beyond. To the scale of that, we just try to give an indication of what that could mean based on historical spend, on ’18 numbers, etc.

But there’s no guarantee that’s what it’s going to be in 2020. I mean I can — the one thing I can tell you is that things change. But they don’t change quickly in these arenas, that’s for sure.

Jerry Revich

OK. Thank you. And then can you just talk about major project new opportunities in government solutions? You mentioned no major recompetes coming up. Well, what about incremental new project opportunities for you folks? What’s the magnitude and timing looks like based on what you see today?

Stuart Bradie

Yeah. We’ve talked quite a bit about things like NASA SENSE, that’s probably the near-term largest one. We’ve got a number coming up in NASA also. I think though that one of the key things to take away or certainly key takeaways for this quarter, we’ll talk a bit more about it on Friday, is the growth in our engineering business.

And our engineering business is not — they don’t really have these massive big awards. It’s a lot of IDIQs. There’s a lot of working with small businesses. You kind of — you set up an IDIQ machine, if you like, that really works hard to sort of be local and work with customers, whether it be in Huntsville or Lexington or wherever it might be, and they’re doing amazingly well.

And I think really as a testament to that, the growth in the engineering business is — we’re very excited about. So I think there’s one or two big things. The Jacksonville recompete, we talked about, for the Marines. Obviously, NASA SENSE.

And we’ve got a number — I don’t really want to steal the thunder from Friday here, but we’ve a got a number coming up that we’ll talk about. And not just in the U.S. but also in the U.K. That is actually very, very exciting.

And I think as we said before, the synergy that we’re seeing between the business lines and, I guess, from the historical acquisitions that we’ve done but also across geographies, synergy and across businesses are just terrific. So again, we’ll explore that further on Friday.

Jerry Revich

OK. We’ll see you then. Thanks.

Stuart Bradie

Thanks.

Operator

Thank you. We will take our next question from Jamie Cook from Crédit Suisse. Please go ahead. Your line is open.

Jamie Cook

Hi. Good morning and congratulations. I guess most of the questions have been answered, but I guess just congratulations on changing your GICS code. But in that respect, how do we think about the strategic importance of the energy solutions and technology solutions business as we try to transition more to a government services type firm? And then my second question whether there’s been any feedback from customers on the Energy side with this announcement.

And then I guess just last question, there’s been a lot of LNG projects that have moved forward which is probably a positive for you and how that impacts the competitive dynamics of the market of the projects that you expect to win going forward with capacity just getting tied up. Thanks.

Stuart Bradie

Yeah. Thanks, Jamie. So the — I mean the first question on the GICS code, I think the rules are quite simple within GICS code land, and that is that if your revenue is greater than 60% in one particular segment, the — your GICS code gets changed. And I think that’s what’s happened here.

We had a whole many quarters in a row where we were well above that level in our government business, and so the change of GICS code is appropriate. Whether they get — it really affects our strategic positioning at all, we’re still firmly on the path that we set out in ’14 and reaffirmed in ’17. And you’ll hear a bit more about that on Friday as to what we think our strategic advantages are and where we’re pointing the company. So no change there.

In terms of customers, we didn’t get any pushback when we were labeled E&C from our government customers, and we’re not seeing much pushback the other way around either. I think Friday we’ll reaffirm that. We’ve not changed path in our commitment to KBR’s position in those markets, it’s still what it was and that will continue to be that way. I think the key piece for me is just how you can actually leverage the capability between those businesses and what that — how that differentiates you in the marketplace.

And again, we’ll explore that further on Friday. And I think you’re right in terms of LNGs moving forward. I’ve been a very clear that we’re going to maintain our commercial discipline. We’re not going to — we don’t need to rush in and book revenue for the sake of revenue.

We’re all about the bottom line. We’re all about quality of earnings. And if the cash profile is not right, we won’t do it. But that said, were getting very mature conversations today.

The level of activity drives that of course, and I’ve been quite clear that it’s OK not to win the first one or maybe not second one of these LNG projects because you kind of want to be in a position with limited people who can do these big complex projects. You want to be in a position where you’re having that mature conversation. And that’s certainly the case. So we’re feeling hugely optimistic about LNG and we’re very optimistic just on the Energy business in general.

And the — our growth profile, we’ll explore this on Friday, is really, really exciting. And I think that across the company, all the markets are firing and we’re very well positioned. So I’ve said before it’s a good time to be at KBR and I think we will lay out that on Friday.

Jamie Cook

Great. I look forward to it. Thank you.

Stuart Bradie

Thanks.

Operator

Thank you. We can take a follow-up question from Lucy Guo from Cowan and Company. Please go ahead. Your line is open.

Lucy Guo

Hi. I couldn’t let you go without asking a LOGCAP question, which is, what — can you just talk about what gives you comfort or confidence that the historic levels of task ordering is a good reference point for going forward? And then second part to that question, maybe if you can give us a preview on the mix of funding between base budget versus reduced contingency and what sort of troop levels may be expected in your forecast. 

Stuart Bradie

Well, I think these are very difficult questions to answer, Lucy, with certainty. I think the — we do know that Afghanistan is very, very complex. There’s quite a significant troop level there. That has been — it’s very difficult to change that quickly.

So we feel that over time things of course will change. But over the next little while it’s unlikely, although there’s lots of high-level discussions going on between the U.S. and the Taliban today, and I’m sure those will continue. So we basically — we don’t know the answer to your question and — but what we try to do is to say that this is what’s happened in the past.

We’ll work up as we work through the transition and get to know this arena and this theater a little bit better, we’ll be able to give you better guidance, but that’s all I think we can really say today. But I think the key takeaway on LOGCAP V really for the audience here is there’s an uncertainty. The worst thing that could happen to KBR is that we were not the winner. And of course in a tendering situation, that is obviously a risk.

And we’ve come out of this, I think, really winning three of the seven regions. One could argue we’ve come out the winner across that. And I think the opportunity for growth across all three of those, particularly — not only Afghanistan, which is the largest, but I think as we — if you think about the geopolitical situation, this readiness and capability start to build and exercise, and things that are going on in Europe and increasingly in the Arctic is quite exciting. And I think we can do a lot around that.

So I think that’s actually the key takeaway, and we’ll explore a little bit more on Friday, but I do think that we’ll know more as we transition.

Lucy Guo

I look forward to catch you up on Friday. Thank you.

Stuart Bradie

Thanks, Lucy.

Operator

Thank you. We have another follow-up question from Tahira Afzal from KeyBanc. Please go ahead. Your line is open.

Tahira Afzal

Hi, folks. I saw you had 10 minutes, so I thought I’d take advantage. So first question, as a follow-up, given the G&A reclassification, any chance you can get an update on the segment margin ranges? And second question is, I know you’ll probably discussed NASA more at length on Friday, but it’s been a year since we got all three pieces in the SENSE together. You’ve talked about SENSE for a while, but I sense — no pun intended, that you might be seeing more market share gain opportunities as well.

Stuart Bradie

Yeah. I think on the margins, Tahira, if you don’t mind, we’ll probably going to give you targets on Friday. So if you can wait a couple of days there. Otherwise, our current margins hold, and we’re feeling pretty good about that.

And we reclassified SG&A just to fall in line really opposite to what the way the government looks at that in terms of rate recoveries and things like that. So that was an appropriate step as we did that. So we will give you the targets with new reclassification on Friday. And without going further, that’s probably — we want to stop there and — but all good.

And in terms of NASA, you’re right, it’s almost a year since we put these businesses together. The integration is going really, really well. And we’ve sort of talked about SENSE for a while because, actually, the procurement cycle takes a while. It’s not — we’re — as you know, we’re down to the final two.

We’re expecting that to come out for a decision, I guess, probably in the middle of the year which is — and that’s still a couple of months to go. Yes, but there’s lots of excitement around what we’re doing in space. And interestingly enough, not only in the U.S. And again, we’re going to explore that a little bit more on Friday.

Tahira Afzal

OK. I better bring a fat North bag for friday then. Thank you.

Stuart Bradie

Good. 

Operator

It appears there are no further questions at this time, Mr. Bradie, so I’d like to turn the conference back to you for any additional or closing remarks.

Stuart Bradie

So, yes. So thanks again for joining us this morning. As I’ve said before, it’s an exciting time to be part of KBR, and of course we look forward to introducing you to the full management team. We’re going to bring the full management team along on Friday and to tell you a little bit more about the shareholder value the new KBR can deliver, not only in 2019 but beyond 2019.

And really to close, I would draw your attention to the KBR logo, that might be the last time you see it. Thank you.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Alison Vasquez

Stuart Bradie

Mark Sopp

Tahira Afzal

Brent Thielman

Lucy Guo

Steve Fisher

Michael Dudas

Unknown speaker

Chad Dillard

Jerry Revich

Jamie Cook

More KBR analysis

All earnings call transcripts





READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.