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KBR Q3 Earnings Beat Estimates, Revenues Miss, Guides Well

Premium technology, engineering, procurement and construction company, KBR, Inc. KBR reported adjusted earnings of 35 cents per share in third-quarter 2017, beating the Zacks Consensus Estimate of 30 cents by 16.7%.

Notably, the company’s shares rose an impressive 5.5% at the close of market on Oct 31, following the company’s earnings release.

The improvement in the company’s bottom-line can largely be attributed to solid performance across all segments. Also, growth in its Affinity joint venture in the U.K. within its Government Services segment during the quarter contributed to the top-line expansion.

Inside the Headlines

Revenues were down 3.6% year over year to $ 1,034 million. Lower activity on various projects in the company’s Engineering and Construction segment resulted in the top-line decline. Further, the top line lagged the consensus mark of $1,048 million.

Segment-wise, Technology & Consulting revenues rose 16.4% year over year to $78 million. The growth is primarily attributable to new consulting contracts from upstream projects.

Government Services revenues charted phenomenal growth as they soared 45.1% to $582 million on a year-over-year basis. Revenue growth were driven by acquisition of HTSI and continued expansion of task orders on existing U.S. Government contracts. In addition, growth on existing program management projects in the U.K supplemented revenue growth.

However, Engineering & Construction revenues continued their weak trajectory, and deteriorated 37.8% year over year to $370 million. Reduced activity on several projects across the sector partly offset by new projects awards in second-half 2016 played spoilsport for the segment. 

Moreover, Non-strategic Business revenues slumped 60% year over year to $4 million. The year-over-year decline is primarily attributable to the final close-out phase of EPC power projects.

KBR, Inc. Price, Consensus and EPS Surprise

KBR, Inc. Price, Consensus and EPS Surprise | KBR, Inc. Quote

As of Sep 30, 2017, the company’s total backlog was pegged at $10.3 billion, down 9.6% on a year-over-year basis. Of the total backlog, about $8.2 billion is booked under the Government Services segment (up 10.8% on a year-over-year basis) and around $1.9 billion under the Engineering & Construction segment (down 47.2% on a year-over-year basis). While Technology and Consulting accounted for $278 million of the backlog (down 18.2% on a year-over-year basis), non-strategic Business had $7 million in backlog (down 90.7%).

Major Contract Wins

During the quarter, KBR clinched some prestigious awards in its Government Services segment, amounting to more than $1 billion dollars. These include a Facilities Management Services Operations (FMSO) contract from the UK Ministry of Defence (MOD), $52 million deal from Federal Aviation Administration (FAA) and support services at various sites within the Kingdom of Bahrain and UAE.

Some of the notable contracts secured by the Engineering and Construction segment include an engineering and project management services contract from JVGAS, pre-front end engineering design (FEED) and project support services deals from BP. Further, during the quarter, the company clinched a Project Management Consultancy (PMC) contract from Occidental of Abu Dhabi to provide PMC services for Dalma and H&G Islands Projects.

Liquidity & Cash Flow

As of Sep 30, 2017, KBR’s cash and equivalents were $511 million, down from $536 million as of Dec 31, 2016.

For the quarter, cash flow generated from operating activities totaled $28 million, up from cash generation of $20 million in the year-ago quarter.

Guidance

Concurrent with the earnings release, KBR raised full-year 2017 results. It now expects adjusted earnings per share in the band of $1.35-$1.50 per share compared with the previously guided range of $1.25-$1.45.

This guidance excludes legal costs associated with legacy U.S. Government contracts. KBR projects incurred legal costs of around $13 million or 9 cents per share for 2017. This estimated legacy legal fees exclude any future cost reimbursement from the U.S. Government.

KBR also raised EBITDA guidance, which is expected to come in the range of $320-$350 million (previous projection: $300 -$350 million). The company reiterated guidance for cash flows and continues to expect it in the range of $120-$200 million for 2017.

Existing Business Scenario

KBR’s Government Services business has been acting as the major profit churner, primarily driven by lucrative contracts from the U.S. military and the new work wins from the UK Ministry of Defense. Moreover, KBR anticipates steady growth for its Technology & Consulting segment and remains bullish about the growing client operational expenditure, which is set to benefit its Engineering and Construction segment. Further, the company anticipates growth across all its key markets in the United States, UK and Australia, driven by continued opportunities across the lifecycle of projects.

KBR currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Some other top-ranked stocks worth considering in the same space include Louisiana-Pacific Corp. LPX, Toll Brothers Inc. TOL and Owens Corning Inc OC. While Louisiana-Pacific Corporation sports a Zacks Rank #1 (Strong Buy), Toll Brothers and Owens Corning carry the same Zacks Rank as KBR. You can see the complete list of today’s Zacks #1 Rank stocks here.

Louisiana-Pacific has a decent earnings surprise history, surpassing estimates twice in the trailing four quarters with an average beat of 1.2%.

Toll Brothers has an impressive earnings surprise history, exceeding estimates thrice in the trailing four quarters with an average beat of 8.5%.

Owens Corning has an impressive earnings surprise history, exceeding estimates thrice in the trailing four quarters with an average beat of 17.5%.

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