A month has gone by since the last earnings report for KBR Inc. (KBR). Shares have added about 9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is KBR due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
KBR’s Q2 Earnings & Revenues Top Estimates
KBR, Inc. reported impressive results for second-quarter 2020, wherein earnings and revenues topped the Zacks Consensus Estimate, given solid margins in Government and Technology businesses.
Notably, the company announced the initiation of a portfolio transformation. KBR is shifting to a two-segment model, featuring Government Solutions (GS) and Technology Solutions (TS).
Stuart Bradie, KBR’s president and CEO, said “We continue to move upmarket into differentiated areas that provide attractive returns, consistent growth and strong cash conversion. This transformation is the culmination of a years-long shift away from high-risk and commoditized markets and toward more agile, technology driven, knowledge-based delivery.”
Inside the Headline Numbers
Adjusted earnings of 39 cents per share surpassed the consensus estimate of 36 cents by 8.3%. The reported figure, however, decreased 4.9% from 41 cents per share reported a year ago.
Total revenues also decreased 2.6% year over year to $1,385 million. The downside was due to completion or near completion of certain GS projects, low volumes on various U.S. and U.K. government contracts, as well as lower activity and progress on projects in the TS unit. These were partially offset by revenue growth in the Energy Solutions or ES business. The top line surpassed the consensus mark of $1,359 million by 2%.
Adjusted EBITDA declined 9.4% year over year to $106 million in the quarter. Adjusted EBITDA margin of 7.7% fell 50 basis points (bps) year over year.
Revenues in the Government Solutions segment decreased 10.5% year over year to $925 million. The downside was due to the completion of disaster recovery work for the U.S. Air Force in 2019, lower work volume on the LogCAP IV project and reduction in revenues related to the Aspire Defence project in U.K. Nonetheless, adjusted EBITDA margin of 11.1% rose 78 bps year over year owing to robust operational performance and progress on international programs.
Technology Solutions’ revenues decreased 21.5% year over year to $73 million due to higher volumes of proprietary equipment deliveries in 2019. That said, adjusted EBITDA margin grew 559 bps from the prior-year quarter to 26%, courtesy of higher license mix, strong execution and cost-control measures.
Energy Solutions’ revenues increased 30.7% year over year to $387 million owing to new awards and the ramp-up of existing projects along the U.S. Gulf Coast, including expansion of services in Mexico. However, adjusted EBITDA declined to 1% from the year-ago figure of 71%.
As of Jun 30, 2020, total backlog came in at $12.59 billion compared with $14.64 billion at 2019-end. Of the total backlog, Government Solutions booked $10.52 billion. Technology Solutions and Energy Solutions segments accounted for $561 million and $1.51 billion of the total backlog, respectively.
Government and Technology units had a book-to-bill ratio of 1 and 1.5, respectively, excluding the impact of long-term PFIs. Notably, it de-booked backlog of approximately $1.2 billion associated with projects in the Energy Solutions business that will no longer be pursued.
Liquidity & Cash Flow
As of Jun 30, 2020, KBR’s cash and equivalents were $635 million, down from $712 million at 2019-end. Long-term debt was $1.07 billion versus $1.18 billion at 2019-end.
In the first six months of 2020, cash provided by operating activities totaled $150 million compared with $81 million in the comparable year-ago period. Adjusted operating cash flow was $113 million, up from $33 million a year ago.
As of Jun 30, 2020, it had $500 million available under the revolving credit facility. Moreover, the company shifted $500 million of capacity formerly available for performance letters of credit to increase the available credit facility capacity during the second quarter.
KBR reaffirmed its adjusted earnings per share guidance of $1.50-$1.80. Moreover, it raised its adjusted operating cash flow guidance to $210-$250 million from $175-$225 million expected earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -7.78% due to these changes.
At this time, KBR has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, KBR has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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