Shares of premium technology, engineering, procurement and construction company KBR, Inc. KBR gained about 3% during the regular trading session on Nov 2, following impressive third-quarter 2015 results.
KBR reported impressive earnings of 40 cents (excluding pre-tax U.S. Government legacy legal fees) per share, which surpassed the Zacks Consensus Estimate of 28 cents by 42.9%.
Operational execution, particularly the better-than-expected performance of non-strategic power projects, acted as a key driver of growth. KBR is on track of attaining $200 million in annual cost savings in 2016.
Inside the Headlines
Revenues fell 27.6% year over year to $1,199 million, owing to volatility in oil & gas markets and subsequent low 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 $1,386 million.
Segment-wise, Technology & Consulting revenues decreased 16% year over year to $79 million. This decline in sales was triggered by two factors, namely, a fall in sales of proprietary equipment, and poor revenues from consulting services due to reduced upstream oil & gas activities.
Moreover, Engineering & Construction revenues fell 30.8% year over year to $828 million. Reduced activities in the company’s construction projects in North America, a pipe fabrication project in Canada and another major LNG project that are approaching completion, hurt the segmental revenues.
Additionally, Government Services revenues declined 1.1% to $176 million, on a year-over-year basis. Revenues were affected by tough year-over-year comparison as the company reaped significant award fee on the LogCAP III contract in third-quarter of 2014.
Also, non-strategic business revenues plummeted 38.6% year over year to $116 million, mainly owing to low revenues from two non-strategic power projects as well as divestiture of the Building Group business unit in second-quarter 2015.
As of Sep 30, 2015, the company’s backlog was $13.3 billion, down 13.1% sequentially. Of the total backlog, about $6.8 billion is booked under the Government Services segment and around $5.7 billion in the Engineering & Construction segment.
Notable Activities during the Quarter
During the quarter, 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 has secured two indefinite-delivery/indefinite quantity (‘IDIQ’) contracts from the U.S. government under which it is offering construction services on a large scale. The IDIQ first contract, worth $249.5 million, entails various military installations while the second IDIQ contract, worth $95 million entails certain renovation-related work within U.S. embassy facilities worldwide. Both of these contracts were provided by the U.S. Army Corps of Engineers and extends up to five years.
Moreover, KBR has secured a prime contractor position in a multiple-award indefinite-delivery/indefinite quantity (IDIQ) contract from the U.S. Air Force. Per the contract, the company will be responsible for providing base life support, and logistics & construction services across the globe. A total of 8 companies were awarded a prime contractor position to compete for specific task orders on the Air Force Contract Augmentation Program (AFCAP IV) that is worth $5 billion. One of the 8 companies to win the prestigious contract, KBR expects to register this contract in the backlog of unfulfilled orders for its Government Services Business Segment.
Liquidity & Cash Flow
As of Sep 30, 2015, KBR’s cash and equivalents were $768 million, down from $970 million as of Dec 31, 2014.
As of Sep 30, 2015, cash flows provided by operating activities in the quarter totaled $54 million, down significantly from $158 million as of Sep 30, 2014.
Our Take
KBR’s financial performance in the quarter, in the 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 gradually.
KBR currently carries a Zacks Rank #1 (Strong Buy). We are now looking forward to the earnings results of other stocks in the Engineering/Research & Development Services industry such as AECOM ACM, Willdan Group, Inc. WLDN and Jacobs Engineering Group Inc. JEC that are going to release this month.
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