KBR’s portfolio transformation is the culmination of the firm’s shift away from more cyclical and lower-margin end markets

Business Strategy & Outlook

Under the leadership of CEO Stuart Bradie, who took the helm in 2014, KBR has focused on shifting its portfolio toward differentiated government solutions. The portfolio rebalancing, which included the acquisitions of Wyle and HTSI in 2016, SGT in 2018, and Centauri in 2020, has already started to bear fruit and led to improved results in recent quarters. In 2020, KBR restructured its portfolio into two segments: government solutions and sustainable technology solutions. The government solutions segment accounted for roughly 64% of the firm’s backlog as of December 2021 (compared with only about 16% as of December 2014), and the shift to long-term government contracts resulted in a more stable portfolio. The segment has some moat-forming potential based on switching costs, as many of the firm’s government contracts are multi year agreements that generate relatively stable cash flows.

The sustainable technology solutions segment (roughly 36% of KBR’s backlog as of December 2021) includes the legacy technology solutions business (which has a unique portfolio of licensed technologies and offers consulting services across a variety of markets, including refining, petrochemicals) as well as the advisory consulting business from the legacy energy solutions segment. Management believes the segment can expand its margins through cost reductions by roughly 100-200 basis points per year, to the high teens by 2024. KBR’s portfolio transformation is the culmination of the firm’s shift away from more cyclical and lower-margin end markets. The company has exited lump-sum engineering, procurement, and construction (including LNG) projects, which will result in a less risky and more profitable portfolio.

Financial Strengths

KBR is on solid financial footing. The firm’s leverage has increased significantly in recent years as a result of acquisitions, from no long-term debt prior to 2016 to roughly $1.9 billion in long-term debt as of December 2021. That said, the company ended 2021 with $370 million in cash and equivalents and has a $1 billion revolving credit facility. Furthermore, there’s no debt maturities to pose any problems over the next few years, as no major debt payments are due until 2023. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost their competitiveness in winning new awards, KBR is to prioritize paying down its debt balance. The company will have a net debt/adjusted EBITDA ratio of roughly 1.9 times in 2022, and the leverage ratio to remain consistent with management’s 2.5-3.0 times target, which is in line with its government solutions peers. KBR will generate average annual operating cash flow of roughly $550 million over the next five years. Management has indicated that it will prioritize maintaining an appropriate leverage ratio, maintaining a dividend, and investing in organic growth, with excess capital allocated to potential M&A opportunities and share repurchases.

Bulls Say

KBR’s sustainable technology solutions segment is well positioned to benefit from growing demand for solutions that address energy efficiency and energy transition.
The acquisitions of Wyle, HTSI, SGT, and Centauri have derisked KBR’s portfolio and shifted it toward relatively stable and high-margin government services work.
There is room for margin expansion in both segments, driven by cost reductions and mix shift to higher-margin differentiated solutions work.

Company Description

KBR (formerly Kellogg, Brown & Root) is a global provider of technology, integrated engineering, procurement, and construction delivery, and operations and maintenance services. The company’s business is organized into two segments: government solutions and sustainable technology solutions. KBR has customers in more than 75 countries, with operations in 40, and employs 36,000 people. The firm generated $7.3 billion in revenue in 2021.

(Source: Morningstar)

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