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Chicago Bridge & Iron (CBI) Posts Huge Q1 Earnings Miss

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Chicago Bridge & Iron Company N.V. (CBI - Free Report) followed last quarter’s massive earnings miss with an even bigger one this quarter. The company’s first-quarter 2017 adjusted earnings came in at 24 cents per share, drastically lagging the Zacks Consensus Estimate of 95 cents.

The colossal 71% earnings miss left investors sorely disappointed, and consequently, shares declined 7.4% in the trading session following the release.

The bottom line fared even worse in year-over-year comparison, having plummeted 76.2% from the year-ago earnings figure of $1.01.Profits were badly hurt due to higher cost to complete estimates on two union construction projects. Net impact of project charges and fall in revenues also hurt the bottom line.

Inside the Headlines

The company reported quarterly revenues of $2,364 million, missing the Zacks Consensus Estimate of $2,426 million. Further, revenues descended 11.4% year over year. The lackluster top-line performance during the quarter was largely a result of revenue declines across three of the company’s four segments.

Reduced activity on the company’s large cost-reimbursable LNG projects in the Asia-Pacific region, the winding down of several other E&C projects, and the adverse timing of projects in its Fabrication Services group hurt the top line.

First-quarter gross profit slumped 40.9% year over year to $151 million, while gross margin contracted a substantial 370 basis points to 8.3%. Margins were deeply affected by charges for material increases in cost-to-complete estimates in two of the company’s union construction projects.

Adjusted income from operations for the quarter came in at $98 million, plunging 47.8% year over year.

The company booked new awards worth $3,315 million during the quarter compared with just $1,197 million in the prior-year quarter. The rise in new award wins was largely attributable to a rebound in the company’s key end markets, particularly in the U.S., the Middle East and China.

New awards include an engineering, procurement and construction contract worth $1.3 billion with Total Petrochemicals & Refining USA. Also, Chicago Bridge & Iron secured a $600 million contract with an integrated energy company for the engineering, procurement, construction and commissioning of a combined-cycle power plant in southern U.S. The company also won several multi-technology and licensing awards in China.

Segmental Revenues

Revenues from the Engineering and Construction segment came in at $1,286 million, down 15.2% on a year-over-year basis, mainly due to the absence of revenues from the divested nuclear operations business line. New awards in this segment were $2,240 million in the quarter, reflecting a humongous six-fold increase from the comparable quarter last year.

Fabrication Services quarterly revenues totaled $476.6 million, falling 7.9% year over year. New awards received by this segment rose (up 19.4%) to $446.3 million at the end of the first quarter compared with $373.7 million in the prior-year quarter.

Technology revenues were up 5.4% year over year to $68 million. Additionally, this segment won over $160.4 million of new contracts in the quarter, reflecting a surge of nearly 91.8% year over year.

Capital Services revenues fell 6.2% year over year to $534.2 million. Further, new contracts received by this segment rose 12.5% to $416.7 million in the quarter.

Liquidity

Chicago Bridge & Iron’s cash and cash equivalents as of Mar 31, 2017 came in at $420.1 million compared with $641.5 million a year ago. Net cash used in operating activities in the quarter came in at $290.7 million, a turnaround from the net cash generated from operating activities of $141.9 million in the comparable period last year. Net long-term debt was $1,266 million at quarter-end compared with $1,288 million as of Dec 31, 2016.

Chicago Bridge & Iron Company N.V. Price, Consensus and EPS Surprise

 

Divestiture of Capital Services Business

In February, Chicago Bridge & Iron entered into a definitive agreement to sell its Capital Services business to an affiliate of the private equity investment firm Veritas Capital for $755 million in cash. The deal is on track to conclude in second-quarter 2017. 

To account for the sale, the company booked a pre-tax non-cash goodwill impairment charge of roughly $655 million in fourth-quarter 2016.

The sale is part of the company’s efforts to realign the business with its long-term strategy and realize cost synergies. The divestiture will generate significant cash proceeds, which Chicago Bridge & Iron will use to reduce its outstanding debt.

Guidance

Chicago Bridge & Iron reiterated its revenue guidance for full-year 2017, while reducing the earnings projection. The company still expects to generate revenues in the range of $9.5–$10.5 billion, of which about 80% was already in its 2016 year-end backlog. However, diluted earnings per share are now anticipated to come in the band of $3.50–$4.00 per share, down from the previous projection of a range of $4.00–$4.60 per share.

To Conclude

Chicago Bridge & Iron’s first-quarter earnings took a terrible beating from macroeconomic uncertainties and prolonged softness in the energy markets. These conditions might sustain in the foreseeable future, which will hit client spending, and consequently Chicago Bridge & Iron’s operations. In fact, the company is seeing increasing global demand for petrochemical and refining opportunities, but final investment decisions are still delayed as clients adjust to global commodity pricing.

Despite these headwinds, Chicago Bridge & Iron is confident about the strong trends in the high-margin Technology operating group, which is a leading indicator of recovery in the energy markets. Further, the company secured robust number of new awards and has an impressive backlog.

Chicago Bridge & Iron currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the broader sector include MasTec, Inc. (MTZ - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) and Dycom Industries, Inc (DY - Free Report) .  While MasTec sports a Zacks Rank #1 (Strong Buy), M.D.C. Holdings and Dycom carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Infrastructure engineering and construction company – MasTec – managed to beat earnings each time over the trailing four quarters. It has an impressive positive average surprise of 34.1%.

M.D.C. Holdings has a modest earnings beat history, having surpassed estimates twice over the trailing four quarters. Last quarter, it beat estimates by 14.7%.

Dycom has a positive average earnings surprise of 17.3% for the last four quarters, having beaten estimates all through.

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