KBR Swings to Earnings in Q4, Revenues Miss Mark, Stock Up

Shares of premium technology, engineering, procurement and construction company KBR, Inc. KBR rallied about 10% on Feb 26, following impressive fourth-quarter 2015 results.

KBR reported adjusted earnings of 36 cents per share, which surpassed the Zacks Consensus Estimate of 31 cents. Also, the robust bottom-line performance represented a remarkable turnaround from a loss of $8.57 per share recorded in the year-ago quarter.

For full-year 2015, the company reported earnings per share of $1.40, as against a loss of $8.66 recorded in full-year 2014.

KBR’s fourth-quarter and 2015 results benefited from its relentless focus on operational execution, margin improvement and operating expense reduction. Meanwhile, KBR is working toward attaining $200 million in annual cost savings in 2016 and has identified more than $165 million savings at the end of fourth-quarter 2015.

Inside the Headlines

Revenues fell 23.8% year over year to $1,080 million, owing to deconsolidation of the Brown & Root Industrial Services business which impacted revenues by $207 million. Also, volatility in oil & gas markets and subsequently low oil prices have been restricting the capital spending by clients which in turn is impeding top-line growth for the company. Also, revenues lagged the consensus mark of $1,208 million by 10.6%.

In full-year 2015, the company’s revenues totaled $5,096 million, down almost 20.0% from the year-ago tally. The year-over-year downside was largely a result of reduced activity within the Engineering and Construction segment on account of the completion of one of the major LNG projects in Australia. Further, completion of multiple projects in key markets like U.S., Middle East and Canada compounded the fall. In addition, elimination of $126 million of revenues related to the deconsolidation of the Industrial Services Americas business in the third quarter of 2015 proved to be a major drag on the top line.

Segment-wise, Technology & Consulting revenues were up 36.8% year over year to $98 million. Improvement at the segment came on the back of increased proprietary equipment sales during the quarter.

Additionally, Government Services revenues soared 56.8% to $174 million, on a year-over-year basis. Revenues benefited from lesser-than-expected charges relating to the legacy LogCAP III and Restore Iraqi Oil (RIO) contracts.

Moreover, Engineering & Construction revenues fell 33% year over year to $696 million. Reduced activities in a major LNG project and several other projects as they approach completion hurt segmental revenues. Also, deconsolidation of KBR's Americas Industrial Services business proved to be a major headwind.

Also, non-strategic business revenues plummeted 41.5% year over year to $117 million, mainly owing to lower revenues from two non-strategic power projects as well as divestiture of the Building Group business in second-quarter 2015.

As of Dec 31, 2015, the company’s backlog was $12.3 billion, up 13.9% on a year-over-year basis. Of the total backlog, about $6.5 billion is booked under the Government Services segment and around $5.1 billion under the Engineering & Construction segment. While Technology and Consulting accounted for $430 million of backlog, non-strategic Business had $239 million in backlog.

Significant Quarter Developments

During the quarter, KBR and its partner were awarded the Magnolia LNG project in Louisiana which has been appended to the backlog of unfulfilled orders. Moreover, earlier this month, KBR announced that its joint venture (JV) with Elbit Systems, the Affinity Flying Training Services, has secured a contract from the U.K. Ministry of Defence (“MOD”). As per the contract, the company will support Ascent Flight Training under U.K. MOD’s United Kingdom Military Flying Training System (“UKMFTS”) program.

This contract is expected to span over 18 years and generate around £500 million in revenues, which will be split equally among the partners. According to management at KBR, revenues from this project will be booked under the order backlog of the company’s Government Services segment in first-quarter 2016. Also, KBR is in talks with the U.K. MoD on the Army 2020 rebasing project that will further unlock lucrative opportunities.

Also, subsequent to the quarter-end, KBR announced the buyout of three subsidiaries of Chematur Technoloiges AB, namely, Weatherly Inc., Plinke GmbH and Chematur Ecoplanning Oy. KBR has quoted a transaction price of $24.5 million, subject to working capital adjustments. The company believes that the acquisition of Weatherly will help it to enhance its position in the fertilizer technologies and life cycle services offerings platform combined with market-leading ammonia solutions. Similarly, the acquisition of Plinke and Ecoplanning will likely help KBR bolster its technology portfolio and improve its competitive position in the areas of Refining, Petrochemical and Fertilizer.

Liquidity & Cash Flow

As of Dec 31, 2015, KBR’s cash and equivalents were $883 million, down from $970 million as of Dec 31, 2014.

As of Dec 31, 2015, cash flow from operating activities in the quarter totaled $226 million, compared with cash utilization of $1,198 million as of Dec 31, 2014.

Guidance

Concurrent with its fourth-quarter results, KBR provided guidance for full-year 2016. The company expects earnings per share within $1.20 to $1.45, excluding legal costs associated with legacy U.S. government contracts. Legal costs are projected at around $15 million or $0.11 per share in 2016.

Our Take

KBR’s financial performance in the quarter, in the face of persistent oil price headwinds, is indeed encouraging. The company’s continuous restructuring efforts, aimed at streamlining its operations to eliminate non-profit business lines and reduce overhead expenses, are beginning to manifest themselves gradually. We are encouraged about the company’s cost-reduction initiatives, and expect it to be a strong growth driver during troubled times. Also, we believe the robust backlog levels add to the company’s strength. However, dwindling oil prices coupled with a rise in legal expenses may pose major concerns going forward.

KBR currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Motorola Solutions, Inc. MSI, Ubiquiti Networks, Inc. UBNT and Facebook, Inc. FB. While Motorola Solutions sports a Zacks Rank #1 (Strong Buy), Ubiquiti Networks and Facebook hold a Zacks Rank #2 (Buy).

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