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KBR Inc. (KBR) Misses Q3 Earnings & Revenues, Guides Down
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Premium technology, engineering, procurement and construction company, KBR, Inc. (KBR - Free Report) , missed earnings expectations after six quarters, as it reported earnings of 30 cents for third-quarter 2016. The figure lagged the Zacks Consensus Estimate of 34 cents by 11.8%. Investors were disheartened with the earnings miss and shares of the company fell almost 4.0% at the close of market on Wednesday.
On a reported basis (including one-time charges and legal fees), the company’s loss came in at 44 cents per share, compared an earnings per share of 38 cents in the prior-year tally. Results in third-quarter 2016 include $126 million in previously announced charges related to forecast cost increases on two projects, the majority of which is for an electric power-generating facility within our Non-strategic Business segment.
The loss during the reported quarter stemmed from inflated charges related on two projects, the majority of which is for an electric power-generating facility within Non-strategic Business segment. Further, poor revenue performance added to KBR’s woes.
Inside the Headlines
Revenues were down 10.5% year over year to $1,073 million. Deconsolidation of Industrial Services business and absence of revenues from the Infrastructure business divesture resulted in the top-line decline. Also, low oil prices have been restricting capital spending by clients, which, in turn, hurt revenues. Also, the top line lagged the consensus mark of $1,194 million.
Segment-wise, Technology & Consulting revenues fell 15.2% year over year to $67 million. A greater presence of lower margin proprietary equipment revenues instead of the higher engineering services and license fees resulted in the overall revenue decline.
Also, Engineering & Construction revenues continued their weak trajectory, and deteriorated 28.1% year over year to $595 million.Reduced activity on several projects including one of the major LNG projects in Australia played a spoilsport. Also, deconsolidation of KBR's Americas Industrial Services business proved to be a major headwind.
However, Government Services revenues charted phenomenal growth as it soared nearly 127.8% to $401 million on a year-over-year basis. Revenues benefited from the solid expansion of existing U.S. government contracts and task orders in support of the U.S. Military. In addition, strategic acquisitions contributed $200 million to the segment’s revenues.
Moreover, Non-strategic Business revenues plummeted 91.4% year over year to $10 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.
As of Sep 30, 2016, the company’s total backlog stood at $11.4 billion, down 14.3% on a year-over-year (y-o-y) basis. Of the total backlog, about $7.4 billion is booked under the Government Services segment (down 10.4% on a y-o-y basis) and around $3.6 billion under the Engineering & Construction segment (down 36.8% on a y-o-y basis). While Technology and Consulting accounted for $340 million of the backlog (down 19.6% on a y-o-y basis), non-strategic Business had $75 million in backlog (down 78.8%).
Major Contract Wins
During the quarter, KBR managed to clinch some prestigious awards in its Government Services and Hydrocarbons segments. These include the Kuwait Base Operations and Security Support Services for the U.S. Army, award of one of five seats on the U.S. Naval Facilities Engineering Command and Pacific's Global Contingency Services Multiple Award Contract (GCSMAC) II.
Major awards in the LNG market include a confidential FEED services contract for a LNG project in North America, a high-level feasibility study for SLNG's Jurong Island LNG Terminal and a pre-FEED study for AALNG's new proposed LNG Hub terminal in Indonesia. Further, KBR won multiple contracts for major Australian civil infrastructure projects.
Going forward, the company remains positive about winning the contract for extension of the existing Allenby/Connaught project of Army 2020 and a 25-year facilities maintenance contract for the major military garrisons in the UK. Currently, most of the company’s backlog comprise low risk and reimbursable contracts, which signals robust margins and greater free cash flow for the upcoming quarters.
Acquisitions to Boost Government Unit
During the quarter, the Engineering and construction giant announced that it has completed the buyout of Honeywell International Inc.’s (HON - Free Report) technology development and engineering unit, Honeywell Technology Solutions, Inc. (“HTSI”). Completion of the acquisition comes a little ahead of its October-end deadline. KBR had inked an agreement to buy HTSI for $266 million (subject to some adjustments) and projects the transaction to result in earnings accretion right from the next year.
Post the buyout, HTSI will be integrated into KBR’s wholly owned subsidiary – KBRwyle – augmenting its $2.5-billion government business. This takeover expands KBR’s lifecycle service capabilities, such as cyber security and IT expertise, enabling it to take care of all the steps involved in the life cycle of aerospace and defense programs. 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.
Also, during the 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.
As of Sep 30, 2016, KBR’s cash and equivalents were $569 million, down from $883 million as of Dec 31, 2015.
For the quarter, cash flow generated from operating activities totaled $20 million, down from the cash generation of $54 million in the year-ago quarter.
Guidance Cut
Concurrent with the earnings release, KBR has revised its guidance for full-year 2016 downward. The company now projects earnings per share within 30–50 cents, excluding legal costs associated with the legacy U.S. government contracts, compared to the earlier guided range of $1.20–$1.45. Expected cost increases on the EPC power project in the Non-Strategic Business segment and on the ammonia project in the E&C segment is attributable to the guidance cut.
The company has reiterated its Legal costs expectations, which are projected at around $15 million or 11 cents per share for 2016. 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 most of the formidable macro headwinds. Though the Technology & Consulting segment had a dismal performance during the third quarter, KBR remains positive about its long-term prospects. The company believes that the Government Services and Technology businesses will provide it some balance between hydrocarbons and government projects. This will allow it to mitigate cyclicality and maximize growth.
Also, we believe that KBR’s strategic acquisitions are helping the company bolster its inorganic growth and expanding market share. The two recent acquisitions of Wyle and Honeywell Technology Solutions highlight the company’s attempt to fortify the foothold of its already thriving Government Services business. Furthermore, we perceive that investments undertaken around the world in refining and petrochemicals market represent lucrative prospects for this Zacks Rank #2 (Buy) company.
Despite these positives, two back-to-back quarters of earnings miss and precipitous revenue decline 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.
Applied Industrial Technologies is one of North America's leading distributors of bearings, linear technologies, power transmission components, rubber products and specialty maintenance items to the MRO and OEM markets. The company managed to beat estimates thrice over the trailing four quarters and has a positive earnings surprise of 4.9%.
Chart Industries is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end use of hydrocarbon and industrial gases. The company had posted a whopping earnings beat of 341.7% in the last reported quarter.
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KBR Inc. (KBR) Misses Q3 Earnings & Revenues, Guides Down
Premium technology, engineering, procurement and construction company, KBR, Inc. (KBR - Free Report) , missed earnings expectations after six quarters, as it reported earnings of 30 cents for third-quarter 2016. The figure lagged the Zacks Consensus Estimate of 34 cents by 11.8%. Investors were disheartened with the earnings miss and shares of the company fell almost 4.0% at the close of market on Wednesday.
On a reported basis (including one-time charges and legal fees), the company’s loss came in at 44 cents per share, compared an earnings per share of 38 cents in the prior-year tally. Results in third-quarter 2016 include $126 million in previously announced charges related to forecast cost increases on two projects, the majority of which is for an electric power-generating facility within our Non-strategic Business segment.
The loss during the reported quarter stemmed from inflated charges related on two projects, the majority of which is for an electric power-generating facility within Non-strategic Business segment. Further, poor revenue performance added to KBR’s woes.
Inside the Headlines
Revenues were down 10.5% year over year to $1,073 million. Deconsolidation of Industrial Services business and absence of revenues from the Infrastructure business divesture resulted in the top-line decline. Also, low oil prices have been restricting capital spending by clients, which, in turn, hurt revenues. Also, the top line lagged the consensus mark of $1,194 million.
Segment-wise, Technology & Consulting revenues fell 15.2% year over year to $67 million. A greater presence of lower margin proprietary equipment revenues instead of the higher engineering services and license fees resulted in the overall revenue decline.
Also, Engineering & Construction revenues continued their weak trajectory, and deteriorated 28.1% year over year to $595 million.Reduced activity on several projects including one of the major LNG projects in Australia played a spoilsport. Also, deconsolidation of KBR's Americas Industrial Services business proved to be a major headwind.
However, Government Services revenues charted phenomenal growth as it soared nearly 127.8% to $401 million on a year-over-year basis. Revenues benefited from the solid expansion of existing U.S. government contracts and task orders in support of the U.S. Military. In addition, strategic acquisitions contributed $200 million to the segment’s revenues.
Moreover, Non-strategic Business revenues plummeted 91.4% year over year to $10 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.
As of Sep 30, 2016, the company’s total backlog stood at $11.4 billion, down 14.3% on a year-over-year (y-o-y) basis. Of the total backlog, about $7.4 billion is booked under the Government Services segment (down 10.4% on a y-o-y basis) and around $3.6 billion under the Engineering & Construction segment (down 36.8% on a y-o-y basis). While Technology and Consulting accounted for $340 million of the backlog (down 19.6% on a y-o-y basis), non-strategic Business had $75 million in backlog (down 78.8%).
Major Contract Wins
During the quarter, KBR managed to clinch some prestigious awards in its Government Services and Hydrocarbons segments. These include the Kuwait Base Operations and Security Support Services for the U.S. Army, award of one of five seats on the U.S. Naval Facilities Engineering Command and Pacific's Global Contingency Services Multiple Award Contract (GCSMAC) II.
Major awards in the LNG market include a confidential FEED services contract for a LNG project in North America, a high-level feasibility study for SLNG's Jurong Island LNG Terminal and a pre-FEED study for AALNG's new proposed LNG Hub terminal in Indonesia. Further, KBR won multiple contracts for major Australian civil infrastructure projects.
Going forward, the company remains positive about winning the contract for extension of the existing Allenby/Connaught project of Army 2020 and a 25-year facilities maintenance contract for the major military garrisons in the UK. Currently, most of the company’s backlog comprise low risk and reimbursable contracts, which signals robust margins and greater free cash flow for the upcoming quarters.
Acquisitions to Boost Government Unit
During the quarter, the Engineering and construction giant announced that it has completed the buyout of Honeywell International Inc.’s (HON - Free Report) technology development and engineering unit, Honeywell Technology Solutions, Inc. (“HTSI”). Completion of the acquisition comes a little ahead of its October-end deadline. KBR had inked an agreement to buy HTSI for $266 million (subject to some adjustments) and projects the transaction to result in earnings accretion right from the next year.
Post the buyout, HTSI will be integrated into KBR’s wholly owned subsidiary – KBRwyle – augmenting its $2.5-billion government business. This takeover expands KBR’s lifecycle service capabilities, such as cyber security and IT expertise, enabling it to take care of all the steps involved in the life cycle of aerospace and defense programs. 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.
Also, during the 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.
KBR INC Price, Consensus and EPS Surprise
KBR INC Price, Consensus and EPS Surprise | KBR INC Quote
Liquidity & Cash Flow
As of Sep 30, 2016, KBR’s cash and equivalents were $569 million, down from $883 million as of Dec 31, 2015.
For the quarter, cash flow generated from operating activities totaled $20 million, down from the cash generation of $54 million in the year-ago quarter.
Guidance Cut
Concurrent with the earnings release, KBR has revised its guidance for full-year 2016 downward. The company now projects earnings per share within 30–50 cents, excluding legal costs associated with the legacy U.S. government contracts, compared to the earlier guided range of $1.20–$1.45. Expected cost increases on the EPC power project in the Non-Strategic Business segment and on the ammonia project in the E&C segment is attributable to the guidance cut.
The company has reiterated its Legal costs expectations, which are projected at around $15 million or 11 cents per share for 2016. 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 most of the formidable macro headwinds. Though the Technology & Consulting segment had a dismal performance during the third quarter, KBR remains positive about its long-term prospects. The company believes that the Government Services and Technology businesses will provide it some balance between hydrocarbons and government projects. This will allow it to mitigate cyclicality and maximize growth.
Also, we believe that KBR’s strategic acquisitions are helping the company bolster its inorganic growth and expanding market share. The two recent acquisitions of Wyle and Honeywell Technology Solutions highlight the company’s attempt to fortify the foothold of its already thriving Government Services business. Furthermore, we perceive that investments undertaken around the world in refining and petrochemicals market represent lucrative prospects for this Zacks Rank #2 (Buy) company.
Despite these positives, two back-to-back quarters of earnings miss and precipitous revenue decline 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
Better-ranked stocks in the industry include Applied Industrial Technologies, Inc. (AIT - Free Report) and Chart Industries Inc. (GTLS - Free Report) , both of which carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Applied Industrial Technologies is one of North America's leading distributors of bearings, linear technologies, power transmission components, rubber products and specialty maintenance items to the MRO and OEM markets. The company managed to beat estimates thrice over the trailing four quarters and has a positive earnings surprise of 4.9%.
Chart Industries is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end use of hydrocarbon and industrial gases. The company had posted a whopping earnings beat of 341.7% in the last reported quarter.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>