Shares of premium technology, engineering, procurement and construction company KBR, Inc. KBR gained 6.6% to close at $18.39 on Aug 4. The upside followed company’s impressive second quarter results.
KBR reported impressive earnings of 46 cents (excluding pre-tax U.S. Government legacy legal fees) per share, which surpassed the Zacks Consensus Estimate by 64.3% (18 cents).
Operational execution as well as stringent focus on cost reduction acted as a key driver of growth. Also, sale of the company’s Building Group subsidiary to Pernix Building Group, LLC aided the improvement in quarterly earnings.
Inside the Headlines
Revenues fell 16.8% year over year to $1,381 million, owing to volatility in oil & gas markets and subsequent weak oil prices. Reduction in prices adversely affected the capital expenditure of clients, thereby impacting the company’s top-line performance. Also, revenues lagged the Zacks Consensus Estimate of $1,397 million.
Segment-wise, Technology & Consulting revenues decreased 20% year over year to $80 million. This decline in sales was triggered by two factors, namely, a fall in sales of proprietary equipment, and poor sales in consulting services due to reduced upstream oil & gas activities.
Moreover, Engineering & Construction revenues fell 21.4% year over year to $953 million. The company’s construction projects in North America, a pipe fabrication project in Canada and another major LNG project are approaching completion, leading to reduced activities. This particularly hurt the segmental revenues.
Additionally, Government Services revenues declined 3.1% to $158 million, on a year-over-year basis. Revenues were affected by legacy charges related to LogCAP III and RIO contracts in Iraq.
On the other hand, non-strategic business revenues improved 3.8% year over year to $190 million, mainly supported by the company’s prudent portfolio-streamlining decisions that involved closure of three non-strategic power plants.
As of Jun 30, 2015, the company’s backlog was $15.3 billion, up 40.4% year over year. Of the total backlog, $5.4 billion is booked under the Government Services segment and $456 in the Non-Strategic segment.
Notable Activities during the Quarter
During the quarter, KBR and Kvaerner, through a joint venture, inked a contract with the leading oil and gas company Statoil ASA STO to develop a topsides platform for the Johan Sverdrup field. Also, with completion of the sale of its Building Group subsidiary, the company recorded $28 million in pre-tax gain and $23 million as cash proceeds.
Moreover, KBR entered into a dual agreement with private equity firm Bernhard Capital Partners (“BCP”). The first agreement aims at establishing a brand new company in partnership with BCP, while the second one is related to the acquisition of KBR’s Canadian pipe fabrication facility. Slated to close before 2015-end, the two transactions are expected to fetch KBR net cash proceeds of approximately $32 million.
Also, KBR witnessed notable progress regarding settlement of multiple legacy disputes related to the U.S. Government contracts. Finally, the company identified and prioritized a target of saving $125 million under its $200-million annual cost reduction plan and expects to realize these benefits in the second half of 2015 through 2016.
Liquidity & Cash Flow
As of Jun 30, 2015, KBR’s cash and equivalents were $731 million, down from $758.0 million as of Mar 31, 2015.
As of Jun 30, 2015, cash utilized for operating activities in the quarter totaled $31 million, down significantly from $108 million of cash utilized from operating activities as of Mar 31, 2015.
2015 Outlook Hiked
KBR has raised its 2015 outlook and now projects earnings in the range of $1.22–1.37 per share as against the previous projection of $1.07–$1.22. This excludes costs associated with legacy U.S. Government contracts.
The uptick in guidance was supported by a $28-million pre-tax gain attributable to sale of the company’s Building Group subsidiary during the quarter.
Our Take
KBR’s financial performance in the quarter, in face of persistent oil price headwinds, is indeed encouraging. We remain encouraged about the company’s cost-reduction initiatives, and expect it to be a strong growth driver during troubled times. Moreover, 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 slow and steady.
Based on favorable industry trends and KBR’s ability to capitalize on them, we are optimistic about the performance of its key business segments in the remaining half of 2015. At the same time, KBR’s competitive position in the government end-markets continues to improve, adding to its strength.
KBR currently carries a Zacks Rank #2 (Buy). Other well-ranked stocks in the industry are Layne Christensen Company LAYN and AO Smith Corp. AOS. While AO Smith sports a Zacks Rank #1 (Strong Buy), Layne Christensen Company holds the same Zacks Rank as KBR.
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