KBR, Inc. (NYSE:KBR) is an engineering, construction, and services company that serves the global hydrocarbons and international government services market sectors. The company offers a portfolio of proprietary technology and consulting services, engineering, construction, procurement, and asset maintenance services, and base operational, logistics, life support, and asset management services.
The company hopes to promote growth as it moves forward by focusing on customer relationships over the long term, being able to consistently deliver on large deals, having world-class technology, and having the financial strength to meet customer needs.
KBR serves customers all over the world. In 2015, 84% of its revenue came from the US, Australia, the Middle East, and Europe with only 43% coming from the US. In addition, it also served customers in Canada, Africa, and Latin America.
The company divides itself into three core segments - Technology and Consulting, Engineering and Construction, and Government Services - and two non-core segments - Non-strategic Business and Other.
Technology and Consulting
In this segment, the company uses its proprietary technologies and its consulting brands to serve as a single global business. The business provides licensed technologies and consulting services to the oil and gas value chain.
The segment focuses on meeting a customer's needs throughout the process of a project and all along the chain to build the greatest amount of value.
Engineering and Construction
This segment tries to leverage the company's expertise mentioned in the section above by providing customers with services geared toward the construction needed for oil and gas, refining, petrochemicals, and chemicals businesses.
Through this segment, the company focuses on long-term service contracts with annuity streams, particularly from the governments of the UK, Australia, and the US.
Non-strategic Business and Other
The company's non-strategic business segment represents the operations the company intends to exit upon completion of existing contracts.
The Other segment includes corporate and business expenses that don't uniquely fall into any one of the categories detailed above.
The company has experienced declining revenues over the past few years. Revenues went from $9.1 billion in 2011 to just $5.1 billion in 2015. The declines over the last two years have been particularly steep and consistent. Revenues went from $7.2 billion in 2013 to $6.4 billion in 2014 to $5.1 billion in 2015.
Net income has also decreased in the aggregate, going from $540 million in 2011 to just $226 million in 2015. In 2014, net income represented a $1.2 billion loss as a result of a loss in gross profit as well as a $660 million restructuring and goodwill impairment charge.
Overall, the company's run over the past few years has been very, very poor, and it doesn't seem to be getting any better.
As the chart above shows, even though earnings rebounded after 2014, the company had consistently declining earnings before, and still earned less than what it did five years ago.
In its latest annual report, the company explains that the decline in revenues from 2014 to 2015 was a result of completions of major projects in the Engineering and Construction segment. But it doesn't mention anything about the company's track record of declining revenue or why revenues weren't higher if a host of projects were either completed or on the verge of completion.
The company also mentions that revenues decreased from 2013 to 2014 for the same reason - the completion of a major project in the Engineering and Construction segment.
It seems like the company's Engineering and Construction segment is experiencing a prolonged decline in business. And it should be pointed out that the completion of major projects isn't a legitimate reason for business to decline. Projects should be bringing in revenue and there should be a steady stream of business for the company.
To make matters worse, the company has also had continually declining cash flows for the past two years. Cash flow from operations decreased from $297 million in 2013 to $170 million in 2014, and then to $47 million in 2015.
The value in 2015 was mostly a result of $264 million more due in accounts payable than in 2014. The decline in 2015 was even more surprising considering the company had a massive net income loss of $1.2 billion in 2014, whereas it was actually profitable in 2015.
As the chart above shows, the company has had drastically declining cash flow over the past few years, going from a substantial $650 million five years ago to a mere $47 million last year.
The decline in cash flow is a bad sign for the company, especially considering how the declining has been so consistently prolonged and hasn't been reversed.
Surprisingly, the company's book value actually increased from 2014 to 2015, with total shareholder's equity going from $935 million to $1.1 billion. Total assets decreased from $4.1 billion to $3.4 billion. Total liabilities also decreased from $3.1 billion to $2.4 billion.
The decline in assets was a result of a decline in cash and a decline in accounts receivable. Cash on hand decreased from $970 million to $883 million in 2015. Accounts receivable decreased from $847 million to $628 million. These changes resulted in a decrease in total assets of $600 million from 2014 to 2015. The company's account payable decreased from 2014 to 2015 by $500 million. This, coupled with a $200 million decrease in pension obligations, led to an overall decrease in total liabilities that allowed the company's book value grow from 2014 to 2015.
Despite the increase from 2014 to 2015 - which, when broken down aren't impressive - the company's book value has drastically decreased over the past five years, going from more than $2.5 billion in value to just $1.1 billion.
From 2013 to 2014, the company's shareholder equity declined from $2.4 billion to just $935 million. Total assets decreased from $5.4 billion to $4.2 billion, while total liabilities increased from $3 billion to $3.3 billion. The decline in assets was, again, a result of a decline in cash and a decline in accounts receivable along with a decline in goodwill.
The company's cash on hand decreased from $1.1 billion to $970 million from 2013 to 2014, while its accounts receivable decreased from $1.1 billion to $847 billion. These declines, along with a decrease in goodwill and intangible assets, resulted in the $1.2 billion decline in total assets. Total liabilities increased only $300 million, as a result of deferred income taxes and greater billings in excess of cost.
Just like its earnings, the company's balance sheet points to a concerning narrative: business is declining.
Given the company's recent earnings and cash woes, it's not surprising to find that its stock has dramatically decreased in value over the past three years, going from roughly $32 to slightly below $15, a loss greater than 50%.
In some cases, this would represent an opportunity. I wrote an article earlier this year about WestRock (NYSE:WRK), a company in the paper and packaging industry whose stock had declined dramatically because of a slight decrease in paper prices. It was obvious that, even though paper prices had declined, the company hadn't lost any value. The company ended up being a great buy and the stock rallied back.
KBR is not in the same position. And in this scenario, the decline in the stock's value is completely justified.
It shouldn't come as a surprise that I feel that KBR would make a horrible investment. The company, in nearly every measurable way, is declining and losing value.
Earnings have been decreasing and periodic impairment charges - most recently in 2014 and 2012 - eat away profits. The company's cash flows have been declining drastically and the company's balance sheet has been hemorrhaging cash.
What's most worrying is that the company's management doesn't seem to be doing anything about its recent performance. When reading the General section in the company's 10K, you get the impression that the company is doing just fine - or feels like it is doing just fine - when it clearly isn't. There doesn't seem to be any sense of urgency or any new initiatives to get the company back on track.
In my opinion, even though short positions don't make money over the long term, KBR would make for a great short investment. There just doesn't seem to be a recovery in sight.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.