KBR’s Gross Margins: Can Expansions in GS Segment Help?
Cost of revenue
KBR’s cost of revenue came in at $4.2 billion in 2016, which was 13% lower than $4.8 billion in 2015. As you can see in the graph below, its cost of revenue has declined over the years.
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KBR’s gross profit margins narrowed to 2.6% in fiscal 2016 from 6.4% in fiscal 2015. In absolute terms, the company posted gross profits of $325 million and $112 million in 2015 and 2016, respectively.
The reduction in gross profit in 2016 was fundamentally due to less activity due to the completion of numerous projects for the E&C (Engineering & Construction) segment as well as the transfer of the industrial services Americas business for the formation of the Brown & Root Industrial Services joint venture with Bernhard Capital Partners. The E&C segment’s gross profit fell 97% in 2016.
Increased cost estimates to finish several US projects in the E&C segment led to further losses in the company’s gross profit. The fall was offset by increased activity from new awards and expansions for existing US government contracts. The GS (Government Services) segment’s gross profit increased $140 million in 2016 as a result of these developments.
Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was $87 million, with an EBITDA margin of 2% in 2016. The result was lower than EBITDA of $349 million and an EBITDA margin of 6.8% in 2015. Its gross profit margin contracted. KBR has a 2017 EBITDA guidance of $320 million–$350 million.
KBR’s peer (XLI) Chicago Bridge & Iron’s (CBI) adjusted EBITDA margin fell sharply from 9.6% in 2015 to 7.3% in 2016. Fluor’s (FLR) EBITDA margin also fell sharply, from 6.3% in 2015 to 4.3% in 2016. Jacobs Engineering (JEC) had a minimal EBITDA loss from 6.2% in 2015 to 6% in 2016. It rose to 6.6% in fiscal 2017.