KBR Announces Fourth Quarter and 2016 Financial Results and 2017 Guidance
Strategic transformation nears completion Pivoting to a higher margin global professional services company with positive outlook into 2017 and beyond Significant risk reduction through resolution of legacy legal and commercial matters
HOUSTON, Texas - February 24, 2017 - KBR, Inc. (NYSE: KBR), a global provider of differentiated, professional services and technologies across the asset and program life cycle within the government services and hydrocarbons industries today announced fourth quarter and fiscal 2016 financial results.
Consolidated revenue in the fourth quarter of 2016 was $1.2 billion compared to $1.1 billion in the fourth quarter of 2015. Net loss attributable to KBR was $87 million or $(0.61) per diluted share and $(0.59) per diluted share on an adjusted basis excluding U.S. Government legacy legal fees of $3 million. This compares to net income of $42 million or $0.29 per diluted share and $0.33 per diluted share on an adjusted basis excluding $5 million in U.S. Government legacy legal fees in the fourth quarter of 2015.
Revenue in the fourth quarter increased from the same period a year ago due to the recent acquisitions in the Government Services segment and organic growth from contracts with the U.S. Military. The loss during the quarter was driven primarily by a reduction in gross profit from a $94 million increase in the forecast costs to complete a downstream EPC project, a reduction in the percentage of completion estimated on an LNG project joint venture in Australia which impacted timing of profit recognition, and restructuring charges. These factors were offset in part by growth in the Government Services business and steady earnings from the Technology & Consulting segment.
"While the overall financial results in 2016 were below expectations, we took actions during the year which have positioned the Company to successfully execute our strategy and grow earnings in the long-term," said Stuart Bradie, President and Chief Executive Officer of KBR, Inc. "Last year was pivotal for KBR with significant highlights such as the completion of several strategic acquisitions: we acquired two well established and highly technical government services companies, a small portfolio of complementary technologies, and a specialty welding and turnarounds company through our Brown & Root joint venture. These acquisitions furthered our long-term strategy to position KBR as a global leader in differentiated professional services, and to do so under an increasingly lower risk, reimbursable-type contract portfolio. These businesses have historically provided stable earnings and cash flows, which should offset the volatility of our financial results associated with large EPC projects traditionally executed by our Engineering & Construction segment. The steady earnings and cash flows also provide us with the financial flexibility to be selective in determining which large EPC prospects we pursue in the future," said Bradie.
"During the fourth quarter, we also resolved a number of outstanding commercial issues and made significant progress in resolving several legal matters including engaging in advanced discussions between Commisa and PEP to settle our legal claim subject to final approval by the parties.Ê Additionally, we resolved several legal matters from the legacy LogCAP III contract, and made significant progress in resolving the SEC investigation and related class action lawsuits related to the restatement of our 2013 financial statements," Bradie continued.
"In 2017, we forecast that over 70% of our revenue will come from work executed under services and reimbursable-type contracts. We also expect to be more competitive in our markets after eliminating annualized costs in excess of $200 million over the past two years.Ê Finally, we made significant progress toward completion of our last domestic EPC power project, which is the final step in exiting the fixed price EPC power business. All of these strategic actions, coupled with key new awards in the Government Services segment during the year, have positioned the Company for stronger long-term earnings growth, and greater free cash flow going forward," Bradie said.
Business Discussion (All comparisons are fourth quarter 2016 versus fourth quarter 2015 unless otherwise noted.)
Government Services (GS) Results
Government Services revenue was $519 million, an increase of $345 million, and gross profit was $43 million, an increase of $49 million from the prior year. These increases were primarily due to a full-quarter's impact of the acquisitions of Wyle and Honeywell's Technical Services business, which both closed during the third quarter of 2016, as well as from expansion of existing U.S. government contracts and task orders supporting the U.S. Military.
Equity in earnings of unconsolidated affiliates was $10 million, up slightly from the prior year. The majority of the equity in earnings for the Government Services segment is related to support of the U.K. government through joint venture annuity-type contracts. These earnings are expected to grow significantly in 2017 and beyond due to the start-up of two long-term major contracts that were awarded in 2016: UKMFTS and Army 2020 which extend for 18 years and 23 years respectively, with a combined award value of almost $1 billion.
The recent acquisitions along with the heritage KBR U.S. Government business now face the market under a single brand: KBRwyle. This brand along with the support KBR provides to the governments in the U.K. and Australia delivers offerings and a strong competitive position that span the full spectrum of government mission requirements including research and development, program management and integration, testing, engineering, logistics, deployed operations, and life-cycle sustainment globally.
Technology & Consulting (T&C) Results
Technology & Consulting's revenue decreased by $8 million to $85 million in the fourth quarter of 2016 while gross profit was $24 million; $4 million greater than the prior year. Gross profit margin in the fourth quarter was 28% and 21% for the full-year 2016, which reflected a change in the mix of projects in the second half of 2016 with more execution of engineering and licensing activities which tend to have higher margins than sales of proprietary equipment that were a significant driver of results in the first half of 2016. We continue to expect the long-term margin percentages for this business to be in the low twenties but actual results may fluctuate between quarters depending on the mix of higher margin licensing and/or engineering services versus the supply of lower-margin proprietary equipment.
During 2016, the majority of the revenue and earnings in this segment was driven by the mainly downstream-focused technology portfolio as the upstream oil consulting portion of the T&C business continued to be challenged by reduced business volume resulting from low oil prices. The consulting sector appears to be gaining momentum through increased activity on smaller upstream studies and projects which typically precede larger investment decisions by the major oil and gas companies.
Engineering & Construction (E&C) Results
In the fourth quarter of 2016, E&C's revenue was $530 million, a decrease of $166 million from the same period in the prior year, mainly due to reduced activity on several projects and the near-completion of one of the major LNG projects in Australia. The E&C segment had a gross loss of $58 million, down $127 million from the prior year. The reduction in gross profit was predominantly due to a $94 million increase in the forecast costs to complete a downstream EPC project in the U.S. due to significant weather delays and lower than previously forecast construction productivity. This is the final legacy lump sum domestic EPC project remaining in the E&C portfolio.
Equity in earnings of unconsolidated affiliates was less than $1 million, down $17 million primarily due to a reduction in the percentage of completion estimated on an LNG project joint venture in Australia where increased forecast reimbursable costs delayed profit recognition to future periods. The results during the quarter also included transaction costs related to our Brown & Root joint venture's acquisition and slower activity on our offshore maintenance joint venture in Mexico.
Looking forward, KBR's E&C business remains well placed to take advantage of the next cycle of modular and mid-scale LNG opportunities in North America and elsewhere, to grow the Industrial Services business globally (operations and maintenance services as well as small CapEx / turnaround projects) and to selectively pursue large hydrocarbons projects provided they meet the appropriate risk/return profile.
Non-strategic Business (NSB) Results
Non-strategic Business' revenue was $56 million, down $61 million from the prior year, primarily due to the completion of two power projects in 2015 and as the last power project in the portfolio nears completion. The segment had a gross loss of $3 million in the quarter. As previously announced, this is the last power project remaining before we completely exit the fixed-priced EPC power business. This project is expected to be complete in the second quarter of 2017.
The company expects 2017 revenues to be comparable to 2016 as increases in activities within the Government Services segment should offset E&C market challenges. The company initiates 2017 fully diluted earnings per share guidance with a range of $1.10 to $1.40 per share.Ê Guidance excludes legal costs associated with legacy U.S. Government contracts which are expected to be approximately $9 million, or $0.07 per fully diluted share in 2017. The estimated legacy legal fees do not assume any cost reimbursement from the U.S. Government that could occur in the future. The upper end of this guidance range includes the estimated net benefit from a potential settlement with PEP. The expected EBITDA range for 2017, which is on the same basis as the EPS guidance, is $300-$350 million. Over 70% of our projected earnings is expected from contracts already secured in our backlog at year-end 2016. Our estimated annual effective tax rate for 2017 is projected to be approximately 27% given the mix of earnings in the various tax jurisdictions in which KBR conducts business.
About KBR, Inc.
KBR is a global provider of differentiated professional services and technologies across the asset and program life cycle within the Government Services and Hydrocarbons sectors. KBR employs almostÊ 37,000 people worldwide, with customers in more than 80 countries, and operations in 40 countries, across three synergistic global businesses:Government Services, serving government customers globally, including capabilities that cover the full life-cycle of defense, space, aviation and other government programs and missions from research and development, through systems engineering, test and evaluation, program management, to operations, maintenance, and field logisticsTechnology & Consulting, including proprietary technology focused on the monetization of hydrocarbons (especially natural gas and natural gas liquids) in ethylene and petrochemicals; ammonia, nitric acid and fertilizers; oil refining; gasification; oil and gas consulting; integrity management; naval architecture and proprietary hulls; and downstream consultingEngineering & Construction, including onshore oil and gas; LNG (liquefaction and regasification)/GTL; oil refining; petrochemicals; chemicals; fertilizers; differentiated EPC; maintenance services (Brown & Root Industrial Services); offshore oil and gas (shallow-water, deep-water, subsea); floating solutions (FPU, FPSO, FLNG & FSRU) and program management
KBR is proud to work with its customers across the globe to provide technology, value-added services, integrated EPC delivery and long term operations and maintenance services to ensure consistent delivery with predictable results.
At KBR, We Deliver. Visit www.kbr.com
Forward Looking Statement
The statements in this press release that are not historical statements, including statements regarding future financial performance, are forward-looking statements within the meaning of the federal securities laws. These statements are subject to numerous risks and uncertainties, many of which are beyond the company's control that could cause actual results to differ materially from the results expressed or implied by the statements. These risks and uncertainties include, but are not limited to: the outcome of and the publicity surrounding audits and investigations by domestic and foreign government agencies and legislative bodies; potential adverse proceedings by such agencies and potential adverse results and consequences from such proceedings; the scope and enforceability of the company's indemnities from its former parent; changes in capital spending by the company's customers; the company's ability to obtain contracts from existing and new customers and perform under those contracts; structural changes in the industries in which the company operates; escalating costs associated with and the performance of fixed-fee projects and the company's ability to control its cost under its contracts; claims negotiations and contract disputes with the company's customers; changes in the demand for or price of oil and/or natural gas; protection of intellectual property rights; compliance with environmental laws; changes in government regulations and regulatory requirements; compliance with laws related to income taxes; unsettled political conditions, war and the effects of terrorism; foreign operations and foreign exchange rates and controls; the development and installation of financial systems; increased competition for employees; the ability to successfully complete and integrate acquisitions; and operations of joint ventures, including joint ventures that are not controlled by the company.
KBR's most recently filed Annual Report on Form 10-K, any subsequent Form 10-Qs and 8-Ks, and other Securities and Exchange Commission filings discuss some of the important risk factors that KBR has identified that may affect the business, results of operations and financial condition. Except as required by law, KBR undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
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Ê KBR, Inc.: Consolidated Statements of OperationsÊ(In millions, except for per share data)Ê(Unaudited)ÊÊÊÊÊ Three Months EndedÊÊÊ December 31,ÊÊÊ December 31,ÊÊÊ 2016ÊÊÊ 2015Ê Revenues:ÊÊÊÊÊÊÊÊÊGovernmentÊServicesÊ$519ÊÊÊ