4q 2017 & fiscal year 2017 financial results · this presentation contains forward-looking...
TRANSCRIPT
February 23, 2018
Stuart Bradie – President and Chief Executive Officer
Mark Sopp – Executive Vice President and Chief Financial Officer
Nelson Rowe – Senior Vice President, Investor Relations
4Q 2017 & Fiscal Year 2017 Financial Results
This presentation contains forward-looking statements regarding our plans, objectives, goals, strategies, future events, future
financial performance and backlog information and other information that is not historical. When used in this presentation, the
words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” or future or conditional verbs such
as “will,” “should,” “could,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking
statements. Such statements are based upon our current expectations and various assumptions, which are made in good faith, and
we believe there is a reasonable basis for them. However, because forward-looking statements relate to the future, they are subject
to inherent risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially
from the forward-looking statements contained in this presentation. Additional information about potential risk factors that could
affect our business and financial results is included in our Form 10-K filed on February 23, 2018.
We caution you not to place undue reliance on the forward-looking statements included in this presentation, which speak only as of
the date hereof. We disclaim any intent or obligation, except as required by law, to revise or update this information to reflect new
information or future events or circumstances.
This presentation contains the financial measures “EBITDA” and “Adjusted EPS”, which are not calculated in accordance with U.S.
GAAP. A reconciliation of the non-GAAP financial measures EBITDA and Adjusted EPS to the most directly comparable GAAP
financial measure has been provided in the Appendix to this presentation.
Forward-Looking Statements
Stuart Bradie | Chief Executive Officer
Safety: Moving Towards Zero Harm
IOGP = International Association of Oil & Gas Producers
0.380.36
0.430.42
0.28
0.240.20
0.230.21
0.19 0.180.16 0.16
0.35 0.350.32
0.31
0.24 0.21
0.00
0.10
0.20
0.30
0.40
0.50
2011 2012 2013 2014 2015 2016 2017
KBR IOGP Top Q IOGP Average
Total Recordable Incident Rate (TRIR) Performance: 2011 - 2017
KBR is focused on an
industry-leading commitment
to employee safety
Over the last 36 months, KBR
has achieved a 52% decrease
in TRIR and a 42% increase in
Zero Harm Days
SAFETY
4
Predicted and improved results, solid project
execution, strong cash flow generation
Delivering growth; Government Services Book/Bill
1.2x and Technology & Consulting Book/Bill 1.3x
Delivering or exceeding targeted margins for all
segments
Consistent results each quarter enabled by
disciplined execution
Operating cash flow at top of guidance
Continued progress resolving legacy and legal
matters
2017
HIGHLIGHTS
5
1.5%
7.7%
FY 2016 FY 2017
$61
$193
FY 2016 FY 2017
Revenue ($MM)
Adjusted EPS* ($)
EBITDA* Margin(%)
Operating Cash Flow($MM)
$4,058 $4,133
$210 $38
FY 2016 FY 2017
KBR excluding NSB NSB
$(0.33)
$1.49
FY 2016 FY 2017
*Consolidated EBITDA and Adjusted EPS reconciliations provided in the Appendix
Strong outlook and favorable trends in all key end markets
Increasing in government and defense spending
Growth in key areas across our Space portfolio
Civil, military and commercial
Continued strong outlook for KBR Technologies in gas monetization, refining
and petrochemicals
Positive outlook in Hydrocarbons cycle driven by shale gas, LNG supply-
demand re-balance and oil price recoveries
6
KBR OVERVIEW
6
Confidence for further strategic expansion in GS - Aspire and SGT
MARKET
OUTLOOK
Mark Sopp | Executive Vice President
Improved stability and generation of operating
profits
Superior margins in T&C business
Restored profitability triggered tax benefit
Adjusted EPS and Operating Cash Flow at
the top of previously raised guidance
CONSOLIDATED
RESULTS
* Gross Profit + Equity in Earnings**Consolidated EBITDA and Adjusted EPS reconciliations provided in the Appendix
8
($ in millions, except EPS) 4Q 2016 4Q 2017 FY 2017
Revenues $ 1,190 $ 937 $ 4,171
Gross Profit $ 6 $ 65 $ 342
Equity in Earnings $ 10 $ 8 $ 72
GP + EE* $ 16 $ 73 $ 414
General & Administrative Expenses ($32) ($40) ($147)
Gain on Disposition of Assets/Restructuring ($17) ($6) ($1)
Operating Income ($33) $ 27 $ 266
Benefit (Provision) for Income Taxes ($57) $ 243 $ 193
Net Interest & Noncontrolling Interest, Other $ 3 $ 5 ($25)
Net Income (Loss) Attributable to KBR ($87) $ 275 $ 434
EBITDA** ($20) $ 48 $ 320
EPS (diluted wtd avg) ($0.61) $ 1.94 $ 3.06
Adjusted EPS** ($0.59) $ 0.28 $ 1.49
Diluted weighted average shares 142 140 141
Operating Cash Flow $ 53 ($45) $ 193
9
2017 Segment Profitability Results vs TargetsSEGMENT
RESULTS
All segments meeting/exceeding margin targets
Government Services
Technology & Consulting
Engineering &Construction
Target Actual Target Actual Target Actual
GP + EE MarginsUpper
single digits %9% Low 20s 24%
Upper single digits %
8%
Operating Income Margins
Upper single digits %
8% High teens 23%Mid to upper single digits %
7%
10
2017 Special Tax Items
TAXES
KBR profit & outlook unlocks valuation allowance benefit
Benefit($ millions)
EPS
Benefit
Valuation Allowance Reduction $223 $1.58
KBR profitability restored; confidence in long-term profit generation
2017 U.S. Tax Reform $18 $0.13
Revalued deferred tax liabilities to 21% rate
Repatriation tax offset with unused foreign tax credits (~$60M)
Total Benefit from Tax Items $241 $1.71
11
Cash, Debt, and Leverage PositionCASH
Strong cash flow performance
Balanced 2017 Capital Allocation:
‒ Annual Dividend payments of $45M
‒ Reduced debt by $180M
‒ Repurchased 3.3M shares for $50M
Recapitalization planned for 2018
2016 2017
Ending Cash Balance 536$ 439$
Gross Debt 650$ 470$
Net Debt 114$ 31$
EBITDA 64$ 320$
Gross Debt/EBITDA 10.2 1.5
Net Debt/EBITDA 1.8 0.1
12
Ichthys LNG, Status and Funding Timeline
Re-measurable
Modular Fabrication
(~12% of Project)
Completed
Cost Reimbursable (CR)
Major Site Construction
(~46% of Project)
Complete 2H 2018
Lump Sum (LS)
A) Combined Cycle Power Plant
(~10% of Project)
Complete 1H 2019
B) E&C of Jetty, Tanks, Buildings
(~32% of Project)
Completed
Uses of Funding
Sources of Funding
2020
Commercial Terms & Status Sources and Uses of Joint Venture Funding
ICHTHYS
12
Expecting Client/Subcontractor Recoveries
$600M+
$300M - $400M
Loans to JV for project
completion
20192018
(Funded via
Contemplated Financing)
13
RECAPITALIZATION
Have been targeting long-term refinancing since early 2017
Long-term refinancing to extend tenor and accommodate SGT and Ichthys
Commitment/underwriting in place; execution planned Q1/Q2 2018
Revolver, LOC facility, Term loan, dedicated Ichthys line
Will consider modest equity component
Expected rates and relevant costs incorporated into 2018 guidance
2018
GUIDANCE
14
Mid-point Adjusted EPS growth of 7%
Note: 2018 guidance includes addition of former JV partner’s share of earnings for Aspire Defence; does not yet include SGT acquisition
Adjusted EPS range $1.35 - $1.45, excluding legacy legal fees
– Estimate for legacy legal fees is $10M or $0.07 EPS
Effective Tax Rate: 22% - 24%
Operating Cash Flow range $125M - $175M
2018 Outlook
15
Strong 2018 U.S. Government Budget
‒ Defense spending increase across multiple funding streams,
including Base and OCO Budgets, solidifies LogCAP in 2018/19
‒ Emphasis on technology innovation and Space Based capabilities
across civil, military, and National security programs
U.K. and Australia governments committed to increase
defense spending to 2 % GDP with a focus on intel,
simulation, naval engineering, security and contingency
operations
Expansion opportunities for the U.K. and Australian MoD
leveraging KBRwyle for expanded defense consulting
services
Solid backlog allows focus on new business synergy pursuits
enabling long-term growth
Majority of earnings cost reimbursable or services under PFI contracts
GOVERNMENT
SERVICES
16
Outlook: Strong Growth
Target Gross Profit Margins Including Equity In
Earnings: Upper-Single Digits % To
Lower-Double Digits %
Government Services Outlook: Strong Growth
Record Q4 bookings and margin performance
TECHNOLOGY
&
CONSULTING
17
Outlook: Steady to Growing
Target Gross Profit Margins:
Low-Twenties % On Average
Increased demand for petrochemical technologies in
feedstock advantaged territories (i.e. North America,
Russia & Middle East) and in strong consumer markets
(China & India)
Increasing demand for niche refining technologies with
changing maritime fuel specifications and regulations
Strong demand for consulting services for new & revamp
projects in response to improving market fundamentals
Government Services Outlook: Strong Growth
Strong market fundamentals in petrochemicals in North
America, Russia and Middle East producing increased
opportunities in greenfield and brownfield projects
Mid-term LNG supply / demand rebalancing indicates
recovery in LNG bidding and front end engineering
Continued focus on brownfield expansion and
maintenance services
Growing services offerings globally allowing greater
selectivity on EPC projects
Oil price stability signals possible inflection point
Expected backlog growth in 2018
ENGINEERING &
CONSTRUCTION
18
Outlook: Positioned for CapEx Recovery
Target Gross Profit Margins Including Equity In Earnings:
Mid-to-High Single Digits %
Company Overview
Provides award-winning, high value engineering, mission operations,
scientific, and IT service solutions to a wide array of federal government
agencies
The company innovates in the areas of: Agile development; big data;
GIS/Geospatial Application, Development; Geographic information systems
and Geospatial Data; Modeling, Simulation and Model Based Systems
Engineering (MBSE)
~2,500 employees (~85% of employee base located at client facilities)
19
Key Platforms and Programs
Key Customers Several recent large contract wins; MSOC, Mesonet, RS3, SPARC,
ProTech, REMIS, SESDA, TEAMS, SSIEP
No major recompetes for next 2 years
90% cost plus / T&M/FP growing
10 major contract vehicles (Army RS3, NOAA, ProTech, GSA Alliant)
CMMI Level 5 for both the Development and Services models
NASA
NOAA
Mission IT
Human Exploration and Operations Mission Directorate
Science Mission Directorate
Space Technology Directorate
Aeronautics Mission Directorate
Ocean surface Topography Program
Satellite Mission Operations and Maintenance Support
National Mesonet Program (Meteorological Observation)
USGS – Technical Support Contract (TSSCIV)
Department of Transportation – (SOFITS)
Key Highlights
Goddard Space Flight Center
Ames Research Center
Glenn Research Center
Johnson Space Center
Kennedy Space Center
Langley Research Center
Franchise at NASA
SGT
ACQUISITION
19
Overview
Transaction Rationale
Sapphire Delivers on Key KBRwyle Existing Strategy
Well-established, tightly integrated business with a strong
brand and reputation
Highly complementary opportunity for a well-established,
space-focused provider
Combination creates top tier services contractor at NASA
Multi-year revenue visibility with a robust pipeline (no
recompetes for next 2 years; 90% reimbursable)
Strong cultural alignment, similar business models, and
minimal integration risks
20
Sapphire Overview
1
2
3
4
5
Grow Space Franchise Grow Core Engineering
Civil• Expand NASA franchise across
multiple centers supported by growing congressional budget tailwinds
• Grow NOAA business and reputation for science and space
Army Command• Leverage Army relationships and
RS3 contract to accelerate CECOM growth, Army’s CommunicationsElectronics Command
• Grow TACOM, Tank Automotive Armaments Command
Military• Recapture Air Force Space
Support programs
• Enhances engineering credentials for MDA & DOD
Mission IT• Adds Data Center capability and
CMMI Level 5 development to existing KBRwyle cybersecurity
Sapphire Overview
20
SGT
ACQUISITION
Annualized revenues of ~$500M
Margins in line with GS norms
Low capital intensity, strong free cash flow
Backlog/Options of $3.4B
Revenue synergies of $100M by 2021
21
Sapphire Overview
21
Key Financial Metrics Deal Financials
Purchase price $355M
EBITDA Multiple low 8’s after tax benefits
Cash and GAAP EPS accretive in year one,
excluding transaction costs
Financial Summary
SGT
ACQUISITION
Largest UK Government infrastructure PFI
35 year PFI contract with UK Ministry of Defence
commenced in 2006
$1.5B contract expansion in 2017 in support of the UK
Army Basing Programme
Scope includes base construction, management,
maintenance and life support for 25% of UK Army
Track record of high performance with established
workforce
Stable, predictable earnings and cash flow for 23 more
years
Now entitled to previous JV partner’s share of earnings and
cash flow
ASPIRE
DEFENCE JV
22
Assuming Full Operational Responsibility
60%18%
23%
KBR including Aspire &
SGT
E&C
T&C
Govt Services
IMPROVING
PORTFOLIO
MIX
46%
18%
36%
KBR before acquisitions
E&C
T&C
Govt Services
Share of EBITDA
$13B
$22B
KBR excluding Acquisitions KBR including Aspire & SGT
Backlog + Option Years@ Dec. 31, 2017
23
KBR Pro Forma with SGT and Aspire
>75% of 2018 earnings from low risk/predictable GS
and T&C businesses
Higher proportion of E&C is services and
reimbursable projects
Step-change in backlog/future visibility
2017
2018
2017 Summary:
Met or exceeded guidance every quarter
Margins expectation across all segments met
Strong cash flow performance
Revenue stabilized with backlog/options growth
Excellent project execution
Integration of both Wyle and HTSI
2018 Performance Expectations:
Strong fundamentals in all three segment markets
Projecting targeted growth in earnings
E&C backlog growth expected
Successful SGT and Aspire transitions
Continued strategic and commercial discipline
Complete refinancing
Maintain capital allocation strategy
2017 SUMMARY
&
2018 PRIORITIES
Delivering on Commitments
24
APPENDIX
Significantly Lower Risk Profile
2017
BACKLOG
Backlog by Contract Type
Total KBR Backlog
At 12/31/17:
$13.4B including options
Cost
Reimbursable,
PFI & Services
ContractsFixed Price
Contracts, E&C
77% of earnings for 2018 secured in backlog
Majority of KBR backlog is currently either long-term,
reimbursable, PFI or service contracts with a lower risk
profile and predictable cash flows
GS backlog excludes unexercised options and ID/IQ and
MATOC contract values not yet under task order; work
ultimately realized may be significantly higher
‒ Current estimate $2.8B in additional unrecognized backlog
Fixed Price
Contracts (GS,
T&C) – Low
Risk
26
27
BACKLOG
Aspire & SGT will add $9B+ to Backlog, including Option Years
$7,821 $7,711 $7,891 $8,183 $8,355
$313 $333 $292 $278
$419
$2,769 $2,537 $2,134 $1,874
$1,790
$1,900 $2,195 $2,405
$2,935 $2,835
4Q160.7x
1Q170.7x
2Q170.8x
3Q171.0x
4Q171.2x
$12,838 $12,790 $12,729 $13,277 $13,405
GS
Total Backlog (including Option Years)
T&C
E&C
Option Years (GS)
Consolidated EBITDA Reconciliation
NON-GAAP
RECONCILIATION
Note: EBITDA is defined as earnings before interest income / expense, income taxes, other non-operating
income / expense (including FX, excluding settlement), depreciation and amortization
28
($ in millions) 4Q 2016 4Q 2017 FY 2017
Net Income Attributable To KBR ($87) $ 275 $ 434
Add Back:
Interest Expense, Net $ 5 $ 4 $ 18
Provision (Benefit) for Income Taxes $ 57 ($243) ($193)
Other Non-Operating Expense (Income) ($9) $ 2 $ 13
Depreciation & Amortization $ 14 $ 10 $ 48
Consolidated EBITDA ($20) $ 48 $ 320
Adjusted EPS Reconciliation
NON-GAAP
RECONCILIATION
29
4Q16 4Q 2017 FY 2017
EPS (diluted) ($0.61) $ 1.94 $ 3.06
Add Back:
Legacy Legal Fees $ 0.02 $ 0.02 $ 0.10
Tax Reform Impact $ 0.00 ($0.13) ($0.13)
Tax Valuation Allowance Reduction $ 0.00 ($1.59) ($1.58)
Shareholder Loan Receivable Impairment $ 0.00 $ 0.04 $ 0.04
Adjusted EPS ($0.59) $ 0.28 $ 1.49
PEMEX Settlement Gain $ 0.00 $ 0.00 ($0.18)
2017 Adjusted EPS before PEMEX ($0.59) $ 0.28 $ 1.31