KBR Inc. (KBR Quick QuoteKBR - Free Report) followed last quarter’s earnings miss with another massive one in its fourth quarter 2016 results. The company posted a huge adjusted loss of 59 cents per share, which lagged the Zacks Consensus Estimate of earnings of 17 cents by a whopping 447%.

Investors were dispirited with the earnings miss and shares of the company fell 3.4% at the close of market on Feb 25.

On a reported basis (including one-time charges and legal fees), the company’s loss came in at 61 cents per share, compared to earnings of 29 cents per share in the prior-year tally.

The loss during the reported quarter stemmed from restructuring charges and a drop in gross profit from an increase of $94 million in the projected costs for completing a downstream EPC project. In addition, a reduction in the percentage of completion estimated on an LNG project joint venture in Australia affected the timing of profit recognition. The negative impact of these factors was somewhat offset by growth in the Government Services business and steady earnings from the Technology & Consulting segment.

For full-year 2016, the company posted a loss of 43 cents per share, in stark contrast to earnings of $1.40 per share in the prior year.

Inside the Headlines

Revenues inched up 1% year over year to $1,190 million, missing the consensus mark of $1,222.3 million. The top line was driven by the expansion of heritage U.S government contracts and also by contribution from the two recent acquisitions in the Government Services segment.

Segment wise, Technology & Consulting revenues fell 8.6% year over year to $85 million. The segment’s upstream oil consulting portion continued to be challenged by reduced business volume ensuing from low oil prices.

Also, Engineering & Construction revenues continued their weak trajectory and plunged 23.9% year over year to $530 million. Reduced activity on several projects including one of the major LNG projects in Australia played a spoilsport. Furthermore, sluggish activity on KBR’s offshore maintenance joint venture in Mexico hurt segmental results.

However, Government Services revenues charted phenomenal growth as it soared 198.3% to $519 million on a year-over-year basis. Revenues benefited from solid expansion of the existing U.S. government contracts and task orders in support of the U.S. Military. In addition, the two recently completed acquisitions contributed to the segment’s revenues.

Moreover, Non-strategic Business revenues plummeted 52.1% year over year to $56 million owing to the completion of two power projects in 2015 and elimination of $9 million of revenues related to the sale of the Infrastructure Americas business in fourth-quarter 2015. KBR is now nearing completion on the last power project before it completely exits the fixed-priced EPC power business.

As of Dec 31, 2016, the company’s total backlog was $10.9 billion, down 11.3% on a year-over-year (y-o-y) basis. Of the total backlog, about $7.8 billion is booked under the Government Services segment (up 20% on a y-o-y basis) and around $2.8 billion under the Engineering & Construction segment (down 46.2% on a y-o-y basis). While Technology and Consulting accounted for $313 million of the backlog (down 27.2% on a y-o-y basis), non-strategic Business had $35 million in backlog (down 85.4%).

Major Contract Wins

During the quarter, KBR won multiple contracts for infrastructure projects in Australia, a contract from a state-owned power generation company in Indonesia and another from the Royal Australian Navy (RAN) at HMAS Cerberus.The infrastructure projects in Australia include aiding expansion of the AU$600-million Mernda Rail Project and the Doric Contractors award to upgrade water infrastructure at the HMAS Stirling Navy base. The other infrastructure project includes providing marine and maritime structural engineering services to the Laing O'Rourke Managing Contractor team.

KBR also secured two global agreements from BP International Limited – one contract for conceptual engineering services, and the other for providing front-end engineering design (FEED) and pre-FEED services.These services would be provided in the offshore, onshore, subsea, greenfield, drilling and brownfield upstream domains in Angola, Alaska, Indonesia, Oman, Trinidad, Azerbaijan and the UK.

Acquisitions

Last quarter, the Engineering and construction giant completed the buyout of Honeywell International Inc.’s (HON Quick QuoteHON - Free Report) technology development and engineering unit – Honeywell Technology Solutions, Inc. (“HTSI”) – for about $266 million. KBR expects the transaction to result in earnings accretion right from the next year.

HTSI was integrated into KBR’s wholly owned subsidiary – KBRwyle – augmenting its $2.5-billion government business. This strategic buyout fortifies KBR’s position as a government services organization. Further, it unlocks opportunities to foray into new services in the aerospace logistics and intelligence domain.

Additionally, in the third quarter, the company concluded the $570-million acquisition of Wyle Inc., a provider of specialized engineering and technical services. Wyle is set to unlock synergistic opportunities in markets where KBR can combine its large-scale logistics and project management capabilities.

During the reported quarter, KBR’s subsidiary Brown & Root Industrial Services, LLC, has acquired the MEI Group, LLC, a provider of turnaround, specialty, and construction related services. This strategic buyout will help KBR’s subsidiary reinforce its maintenance business and achieve sustainable growth opportunities, going forward.

2016 was, thus, a noteworthy year for KBR, as it completed several strategic acquisitions, including two established and highly technical government services companies, a portfolio of complementary technologies, and a specialty welding and turnarounds company through its Brown & Root joint venture.

KBR, Inc. Price, Consensus and EPS Surprise

KBR, Inc. Price, Consensus and EPS Surprise | KBR, Inc. Quote

Liquidity & Cash Flow

As of Dec 31, 2016, KBR’s cash and equivalents were $536 million, down from $883 million as of Dec 31, 2015.

For the quarter, cash flow generated from operating activities came in at $61 million, up from $47 million in the year-ago quarter.

Guidance

Concurrent with the earnings release, KBR provided its guidance for full-year 2017 results. The company projects earnings per share within $1.10–$1.40, excluding legal costs associated with the legacy U.S. government contracts. The company’s EBITDA is expected to come in the range of $300–$350 million. Over 70% of the projected earnings are expected to be generated from contracts already secured in KBR’s backlog at year-end 2016.

The company anticipates incurring legal costs of around $9 million or 7 cents per share for 2017. This estimated legacy legal fees exclude any future cost reimbursement from the U.S. Government.

To Conclude

Of late, KBR’s Government Services business has been acting as the major profit churner, helping the company brave past formidable macro headwinds. The company continues to believe that the Government Services and Technology businesses will provide it some balance between hydrocarbons and government projects.

We expect the company to become more competitive after reducing over $200 million in annualized costs over the past two years. KBR is also close to completing its last domestic EPC power project, after which it can exit the fixed-price EPC power business. These strategic actions and recent awards will likely drive long-term earnings growth, and help the company generate greater free cash flow, in the coming times.

Despite these positives, three back-to-back quarters of earnings miss are unlikely to go well with the investors. The overall macroeconomic sluggishness remains a major concern for the company. Moreover, the restructuring actions, though profitable for the long run, are restricting near-term profitability.

Stocks to Consider

KBR presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader sector include II-VI Incorporated and MasTec, Inc. (MTZ Quick QuoteMTZ - Free Report) .  

II-VI Incorporated, sporting a Zacks Rank #1, has registered a remarkable positive average surprise of over 59.2% for the last four quarters, driven by four remarkable consecutive beats. You can see the complete list of today’s Zacks #1 Rank stocks here.

Infrastructure engineering and construction company – MasTec – has managed to beat earnings each time over the trailing four quarters. It has a positive average surprise of 54.4% and holds a Zacks Rank #2 (Buy).

A Full-Blown Technological Breakthrough in the Making

Zacks’ Aggressive Growth Strategist Brian Bolan explores autonomous cars in our latest Special Report, Driverless Cars: Your Roadmap to Mega-Profits Today. In addition to who will be selling them and how the auto industry will be impacted, Brian reveals 8 stocks with tremendous gain potential to feed off this phenomenon. Click to see the stocks right now >>