KBR, Inc. (NYSE:KBR), a global provider of differentiated, professional services and technologies across the asset and program life cycle within the hydrocarbons and government services industries today announced third quarter 2016 financial results

Net loss attributable to KBR was $(63) million or $(0.44) per diluted share including U.S. Government legacy legal fees of less than $1 million in the third quarter of 2016 compared to net income of $55 million or $0.38 per diluted share ($0.40 per diluted share excluding $3 million in legacy legal fees) in the third quarter of 2015. Results in the third quarter of 2016 include $126 million in previously announced charges related to forecast cost increases on two projects, the majority of which is for an electric power-generating facility within our Non-strategic Business segment. The Company previously announced it would exit the business of constructing fixed-price power plants upon completion of this one remaining project. Consolidated revenue in the third quarter of 2016 was $1.1 billion compared to $1.2 billion in the third quarter of 2015.

“During the quarter, we concluded the acquisitions of two professional services companies which provide high-end technology solutions for government clients. The addition of Wyle and Honeywell’s services business (HTSI) to our portfolio adds a large number of reimbursable professional services contracts executed by over 7,000 highly-skilled employees. These acquisitions provide more balance between our Hydrocarbons and Government Services businesses. Therefore, despite the disappointing results on the two projects this quarter, implementation of KBR’s strategic plan remains on course,” said Stuart Bradie, President and Chief Executive Officer of KBR, Inc.

“During the quarter, KBR was also awarded several key contracts in both our Government Services and Hydrocarbons segments. These significant wins include: the Kuwait Base Operations and Security Support Services for the U.S. Army and the award of one of five seats on the U.S. Naval Facilities Engineering Command, Pacific’s Global Contingency Services Multiple Award Contract (GCSMAC) II. In addition, we expect to announce the win in 4Q16 of the extension of the existing Allenby/Connaught project, Army 2020, for initial construction and concurrent program management services and facilities maintenance for 25 years at the major military garrisons in the U.K. We also won multiple contracts for major Australian civil infrastructure projects and the LNG market continues to show signs of increasing activity with the awards to KBR of the second phase of a contract with Woodfibre LNG for multi-phased FEED services, a confidential FEED services contract for a North American mid-scale LNG project, a high-level feasibility study for SLNG’s Jurong Island LNG Terminal and a pre-FEED study for AALNG’s new proposed LNG Hub terminal in Indonesia. The growth in backlog in the third quarter is predominantly from longer-term, low risk and reimbursable contracts which despite the ongoing challenges in the hydrocarbons sector, will result in improving margins and greater free cash flow in 2017 and beyond. Thus, we believe our opportunity pipeline will continue to grow,” Bradie said.

Business Discussion (All comparisons are third quarter 2016 versus third quarter 2015 unless otherwise noted.)

Technology & Consulting (T&C) Results

Technology & Consulting gross profit was $17 million which was flat with results from the prior year while revenue decreased by $12 million to $67 million. The higher gross profit margin in the third quarter of 2016 of 25% reflects a change in the mix of projects executed including lower volume from proprietary equipment sales which tends to have lower profitability and an increase in licensing activities. We continue to expect the long-term margin percentages for this business to be in the low twenties but may fluctuate between quarters depending on the mix of licensing, engineering services and the supply of proprietary equipment.

The majority of the revenue and earnings in this segment are driven by the technology portfolio as the upstream consulting portion of the T&C business remains challenged from reduced volume of business caused by low oil prices.

Engineering & Construction (E&C) Results

Engineering & Construction gross profit was $1 million, down $47 million from the prior year. The reduction in gross profit was due primarily to $40 million in increased costs related to the mechanical failure of a vendor-supplied compressor and pumps during commissioning as well as various mechanical issues encountered during startup of an EPC ammonia project in the U.S. as well as lower activity on several projects including a major LNG project in Australia. The ammonia project has completed performance testing and the plant has successfully been handed over to the customer. KBR expects to seek and recover compensation from vendors on this project; however, the financial results do not currently include any estimates for recoveries.

Revenue was $595 million, a decrease of $233 million mainly due to reduced activity on several projects including one of the major LNG projects in Australia and the deconsolidation of KBR’s Americas Industrial Services business which had revenues of $122 million in 3Q15.

Equity in earnings of unconsolidated affiliates was $11 million, down $15 million, predominantly due to slower activity on an LNG project joint venture in Australia as well as our offshore maintenance joint venture in Mexico.

Government Services (GS) Results

Government Services gross profit was $32 million, an increase of $24 million, while revenue was $401 million, an increase of $225 million from the prior year. This increase was primarily due to expansion of existing U.S. government contracts and task orders supporting the U.S. Military and from the inclusion of the two recent acquisitions which added approximately $200 million to revenues.

Equity in earnings of unconsolidated affiliates was $8 million, down $1 million, due to reduced equity earnings from a U.K. Ministry of Defense construction project that was nearing completion in 2015. The majority of the results related to support of the U.K. government comes through joint venture annuity-type contracts which result in equity in earnings and these results are expected to continue to grow in 2017 and beyond from activities on the U.K. Military Flying Training System (UKMFTS) program awarded earlier this year and the expected soon-to-be awarded large scale Army 2020 rebasing contract.

Under the KBRwyle brand, which now includes the capabilities and service offerings from the two recent acquisitions as well as the heritage KBR U.S. government business, KBR expects to expand its offerings and competitive position to span the full spectrum of government mission requirements including research and development, testing, engineering, logistics, deployed operations, and life-cycle sustainment ranging from austere locations on earth to outer space. We expect revenues for this segment to grow in the coming years at rates beyond the overall projected spending forecasts of U.S. and foreign governments.

Non-strategic Business (NSB) Results

Non-strategic Business had a gross loss of $86 million in the quarter on an EPC project for an electric power-generating facility due to increased forecast subcontractor costs stemming from poor subcontractor productivity, resulting schedule delays and changes in project execution strategy. These costs largely stem from the impact of poor performance by the turbine supplier which continues to adversely impact construction progress. KBR is seeking compensation from the turbine supplier, however, we have not currently assumed any recovery for financial reporting purposes. As previously announced, the Company intends to exit the fixed priced EPC power business for new power projects. This project is the last within the Company’s backlog of unfilled orders and is expected to be complete in the first half of 2017. Revenue was $10 million, down $106 million, primarily due to the completion of two power projects in 2015 as well as the elimination of $9 million of revenues related to the sale of the Infrastructure Americas business in 4Q15.

Strategic Actions Update

During the third quarter, the company incurred $7 million in pre-tax restructuring costs primarily related to employee severance and real estate restructuring costs. The integration of Wyle and HTSI acquisitions made in 3Q16 are well underway with minimal business interruption. The financial results include $8 million in deal and integration costs related to the two transactions. The Company continues to seek opportunities to supplement our current technology portfolio, expand our global footprint in Industrial Services, and grow our high-end Government Services business.

Guidance

The company confirms its previously issued full year 2016 fully diluted earnings per share guidance of $0.30 to $0.50 per share, excluding legal costs associated with legacy U.S. Government contracts, from previous guidance of between $1.20 and $1.45 per share. The reduction in earnings guidance is specifically related to the expected cost increases on the EPC power project in the Non-Strategic Business segment and on the ammonia project in the E&C segment as announced in September. KBR continues to expect the legacy legal costs to be approximately $15 million, or $0.11 per fully diluted share in 2016. The estimated legacy legal fees do not assume any cost reimbursement from the U.S. Government that could occur in the future.

The effective tax rate was approximately 17% and 43% for the three and nine months ended September 30, 2016, respectively. Our estimated annual effective tax rate for 2016 is projected to be 52% primarily due to project losses in the U.S. for which we do not recognize tax benefits as well as forecasted income in higher tax rate jurisdictions.