KBR Inc. (KBR) Q1 Earnings in Line, Revenues Lag, Stock Down
Zacks Equity Research
Updated
Shares of premium professional services and technologies provider, KBR Inc. KBR declined 9.2% at the close of market on Apr 28, following the company’s first-quarter 2017 earnings release.
Investors were clearly disappointed as the company reported adjusted earnings of 28 cents, which was in line with the Zacks Consensus Estimate.
On a reported basis (including one-time charges and legal fees), the company’s earnings came in at 26 cents per share, down 13.3% year over year. Rise in reimbursable cost on a large Liquefied Natural Gas (“LNG”) joint-venture project in Australia proved to be a major drag on the bottom-line performance.
Inside the Headlines
Revenues were up 11.0% year over year to $1,106 million. However, the top line missed the Zacks Consensus mark of $1,110 million.
The sturdy top-line growth is primarily attributable to recent acquisitions in the Government Services segment and organic growth from contracts with the U.S. Military.
Segment wise, Technology & Consulting revenues fell 21.7% year over year to $76 million. Lower volume of activity on major projects, due to unfavorable timing in the upstream oil and gas business, weighed down on the top-line performance of this segment.
Moreover, Engineering & Construction revenues continued their weak trajectory and decreased 19.3% year over year to $489 million. Reduced activity on several projects continues to hurt sales of this business.
However, Government Services revenues charted phenomenal growth as it soared 145.2% to $515 million on a year-over-year basis. Previously completed buyouts, including Wyle and Honeywell Technology Solutions, Inc. in the third quarter of 2016, proved to be major catalysts. Furthermore, continued expansion of task orders on existing U.S. Government contracts, including LogCAP IV, as well as other contracts to support the U.S. military, boosted the top-line performance of this segment.
On the other hand, Non-strategic Business revenues plummeted 68.7% year over year to $26 million owing to lower activity on EPC power projects. KBR has been strategically winding down its fixed-price EPC power projects in the U.S. to focus on core profitable areas. The final fixed-price EPC power project in the U.S. reached substantial completion during first-quarter 2017.
As of Mar 31, 2017, the company’s total backlog was $10.6 billion, down 2.8% on a year-over-year basis. Of the total backlog, about $7.7 billion is booked under the Government Services segment (down 1.3% sequentially) and around $2.5 billion under the Engineering & Construction segment (down 10.7% sequentially). While Technology and Consulting accounted for $333 million of the backlog (down 6.4% sequentially), non-strategic Business had $14 million in backlog (down 60.0%).
KBR, Inc. Price, Consensus and EPS Surprise
KBR, Inc. Price, Consensus and EPS Surprise | KBR, Inc. Quote
Major Contract Wins
Under the Government Services business, KBRwyle clinched a multi-award task order contract from the U.S. Air Force's “Civil Engineer Center for engineering and construction” to support the U.S. military operations on a global scale. Also, it won an engineering services contract by NASA to support more than 20 NASA exploration missions.
In the Technology and Services business, the company won a contract by Mangalore Chemicals and Fertilizers LTD for its ammonia plant in India and another technology licensing and basic engineering contract from LG Chem in South Korea. KBR’s Engineering and Construction business secured a contract from Sydney Desalination Plant Pty Limited for its desalination plant and a services contract by international pager products maker, International Paper (IP).
Liquidity & Cash Flow
As of Mar 31, 2017, KBR’s cash and equivalents were $410 million, down from $536 million as of Dec 31, 2016.
For the quarter, cash flow used in operating activities came in at $115 million, significantly higher than $21 million recorded in the year-ago quarter.
Guidance
Concurrent with the earnings release, KBR reiterated its full-year 2017 results. The company continues to expect earnings per share within $1.10–$1.40. This guidance excludes legal costs associated with legacy U.S. Government contracts. KBR projects 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.
Also, post the resolution of the PEMEX settlement, the company remains confident that earnings per share will be above the mid-point of the range. KBR’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.
Our Take
Over the past few quarters, KBR has been plagued by a host of execution issues in certain major projects in the Engineering and Construction segment, which, in turn, have proved to be a major drag on its quarterly results. For quite some time now, KBR has been witnessing huge cash outflows to fund losses on the EPC projects. Also, reduced capital expenditure by key clients and currency fluctuations are eroding backlogs of this Zacks Rank #4 (Sell) company.
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.
Despite these challenges, the strategic buyouts in the company’s government business are showing promise. The company believes that integration of Wyle and HTSI will fortify its foothold in the domestic technology-focused engineering services industry. KBR remains confident that these buyouts will continue to unlock multiple opportunities in government business.
Stocks to Consider
Some better-ranked stocks in the industry include Louisiana-Pacific Corporation LPX, Dycom Industries, Inc DY, M.D.C. Holdings, Inc. MDC. While Louisiana-Pacific and Dycom sport a Zacks Rank #1 (Strong Buy), M.D.C. Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Louisiana-Pacific has an impressive average positive earnings surprise of 66.3%, with three beats over the last four quarters.
Dycom has a positive average earnings surprise of 17.30% for the last four quarters, having beaten estimates all through.
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%.
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