KBR mindful of 'deal fever' amid market consolidation

KBR has not been shy in using big-ticket acquisitions as a way to reinvent its government business from what it was before and hence change the company’s overall profile.

But during KBR’s fourth quarter earnings call Thursday, executives did not necessarily close the door on making another similar deal of both size and scope but also noted the government market’s current merger-and-acquisition landscape.

“If we can find big strategic and accretive M&A that really sort of moves the needle or takes us into new areas or with customer sets, go up the value chain, then we'll look at it very, very seriously,” CEO Stuart Bradie told investors. “But we won't overpay. We won't get sucked into that, that death spiral. We're very clear about what we want and we're very clear that we're not going to let our desire to get there runaway with common sense.”

Bradie acknowledged there has been “quite a lot of activity in the M&A space” and “particularly in the government solutions arena,” but his earlier statement that the company does not want to pay too much might be a reference to the current pricing landscape.

Government services companies are trading at or near record valuations given the frothy budget and economic landscape, which means sellers are coming to the market with high expectations and thus some prospective buyers are thinking more than twice.

That dynamic has not necessarily led to a slowdown in deals though, given what has closed and been announced over the course of February alone.

The organic revenue picture for KBR’s government group also might explain why the company is turning its attention inward. Excluding acquired revenue, sales climbed 9 percent last year organically and 14 percent overall to $3.9 billion.

As a frame of reference, the government group now represents almost 69 percent of KBR’s overall revenue profile compared to what it was in 2015 -- the last year before the company’s first of three acquisitions that have since changed the picture entirely.

In addition, the government group also recorded a 1.1 book-to-bill ratio for the year to show its backlog of contracts grew faster than sales were booked against it.

Houston-based KBR cleared its largest recompete earlier this year in a $400 million NASA research support contract. Chief Financial Officer Mark Sopp told analysts that means the company’s “recompete risk for the rest of 2020 is quite low,” which means more attention this year is on pursuing new business.

Close to 110 of KBR’s current pursuits are for opportunities $100 million or more, Sopp said. KBR also sees continued growth in opportunities across the space sector -- an area the company has identified from the beginning as a key priority for its government business.

“If you can think about where the investment is going and what the political priorities are in NASA, it's really to get people back to the moon and then onwards to Mars,” Bradie said.

“With a significant increase in NASA's budget, the largest that certainly, I've been aware of in recent times, and the focus very much being on human spaceflight, There's a number of things that are coming through that we're feeling very excited about.”

KBR is targeting an organic compound annual growth rate of between 6 and 10 percent by 2022 for the government group, which also showed improvement on the bottom line during 2019 in addition to on the top line.

The adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization) climbed to 10.4 percent from 9.3 percent in 2018. Investors use this metric to measure the profitability of government services companies.