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KBR Q3 Earnings Up Y/Y; Lag Estimates

Zacks Equity Research

KBR Inc’s(KBR) share prices climbed a meager 0.1% a day after reporting third-quarter results on Oct 24. Third-quarter 2013 net income and earnings per share came in at $24 million and 16 cents, which was a great improvement from year-ago quarter’s net loss of $81 million or 55 cents per share, respectively. However, earnings fell way short of the Zacks Consensus Estimate of 71 cents.


Revenues came in at $1.8 billion compared with $2.0 billion in the third quarter of 2012. The revenues also fell 10% short of the Zacks Consensus Estimate of $2.0 billion. The decline was primarily due to the company’s adverse tax conditions following the separation from the parent company and the taxes levied on some non-operational activities. Moreover, a delay in completion of a project dragged the revenues lower. However, the company’s strong cash flow and a healthy book-to-bill ratio partially offset the negatives. The year-ago quarter included a $178 million worth goodwill impairment charge.

Segment Details

Gas Monetization segment’s revenues declined 32% year over year to $552 million. The decline in revenues was primarily attributed  to low project activity during the quarter. The company completed two major projects Skikda LNG and Escravos GTL. However, the job income from the segment improved 7% to $157 million driven by the change order for the Gorgon LNG project and increased revenues from some FEED projects including Ichthys LNG EPC.

Revenues in the Hydrocarbons segment increased 17.4% year over year to $364 million. The job income of the segment was down 4.2% year over year owing to the less-than-expected earnings from the ammonia project based in Venezuela. A gain of $5 million from winning the arbitration award for an Egyptian company offset the loss partially.

The Infrastructure, Government and Power (:IGP) segment’s revenues in the quarter declined 11.5% year over year to $383 million. In addition, job income from the segment contracted 9.7% to $69 million. The decline was driven by the reductions in the Infrastructure based projects and construction volume for the Allenby & Connaught project. The sluggish activity on the LogCAP IV contract also impacted the segment negatively. The loss was partially offset by a $6 million gain from the cost cutting initiatives of the company. Also, the charges of $8 million on the Indonesian project did not repeat in 2013, pushing up the year-on-year income.

The Services segment reported revenue growth of 17.9% during the quarter to $494 million. Job income increased 107% to $31 million from $15 million in the prior-year quarter. The increase in job income was primarily driven by several new module fabrications and turnaround projects in Canada and the absence of $21 million charges that occurred in the prior-year quarter. The increase was also offset by contract expiration and decreased activity in company’s joint venture with Mantenimiento Marino de Mexico (MMM).

Other segment revenues decreased 14.3% year over year to $18 million. Job income decreased 40% to $9 million due to reduction in gas supplies and lower ammonia prices at the EBIC ammonia plant in Egypt. The increased maintenance project for a U.K. project also contributed to the decline.

Margins and Balance Sheet

Operating income in the third quarter of 2013 was $166 million, compared with operating loss of $11 million in the prior-year quarter. Operating income increased 35% sequentially.

KBR ended the quarter with cash and cash equivalents of $959 million, compared with $1.05 billion as of Dec 31, 2012.

Net cash flow from operating activities for the nine-month period ended on Sep 30 was $81 million, compared with negative $11 million in the prior-year period. However, operating cash flow from this quarter was $178 million. Capital expenditures during the quarter were $17 million and the company paid $12 million dividend for $29 million cash deployment in the quarter.


The company reaffirmed its earnings guidance to be in the lower end of the previous range of $2.55–$2.90 per share.

KBR currently has a Zacks Rank #2 (Buy). Other stocks in the industry worth buying at the moment are Jacobs Engineering Group Inc. (JEC), Premier Oil plc (PMOIY) and Great Lakes Dredge & Dock Corporation (GLDD). All three carry a Zacks Rank #2 (Buy).

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