KBR, Inc. Q2 2026 Earnings Call

Hello everyone. Thank you for joining us and welcome to KBR second quarter 2020 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Rachel Goldwait, Head of Investor Relations. Rachael. Go ahead.

Thank you and good morning. Welcome to KBR second quarter 2020 earnings call. Joining me today are Stuart Bradie, president and CEO. And Shad Evans, Executive Vice President and CFO. Stuart and Shad will cover highlights from the quarter. And then we'll open the line for your questions. Today's earnings presentation is available on the Investor Relations section of our website at kbr.com. As outlined on slide two, today's discussion includes forward looking statements and certain non-GAAP financial measures. Additional information, including reconciliations to the nearest GAAP measures, can be found in the presentation appendix. With that, I'll turn the call over to Stuart.

Thanks, Rachel. And good morning, everyone. I will pick up on slide four. Before we get. Into the meat of the presentation, I wanted to briefly highlight a 2025 Sustainability and Corporate Responsibility report, which we published a few weeks ago This is our fifth year issuing the report, and it reflects an important part of how KBR operate sustainability, safety and responsible delivery are embedded in how we manage risk, develop our people. And of course, deliver for our customers. This year's report highlights record safety, performance, continued progress against our environmental commitment, and 35% of revenues focused on sustainability As we move toward operating as two companies that operating discipline will remain an important part of the culture and the value proposition of both businesses. On to slide five. Today. We will focus on four key messages. First, we delivered a strong first half with a results tacking slightly ahead of our planned cadence. Second. We have strong visibility across both the businesses, supported by record backlog and SDF, and significant awarded work in MTF that has yet to be reflected in backlog. Third, our plant separation remains firmly on track with transaction leadership and day one readiness milestones continuing to advance.

And finally, we are reaffirming our 2026 guidance and remain focused on execution. Cash generation, disciplined capital allocation, and of course, a successful separation. Moving to slide three. This. Guide highlights our progress against the four strategic pillars that continue to guide KBR. Our focus on operational excellence and capital deployment here, and then discuss growth and differentiated solutions on the next two slides. On operational excellence, we continue to execute for our customers while standing up to stand alone companies. Very important. Importantly that. Work has not distracted us from delivering for customers. Growing the business or executing against our financial commitments. We continue to win in the market, build backlog across both businesses, and deliver solid performance with year to date adjusted EBITDA margin of 13%, one 3%, keeping us on track for another strong year. At the same time, we're taking actions ahead of separation to reduce incremental standalone costs and mitigate synergies across both businesses. We are simplifying organizational structures, driving productivity and increasing accountability so that each company enters 2027 with a leaner cost base and stronger margin potential for Spinco. The priority is establishing a standalone public company, while maintaining competitive rates and preserving our position.

Across both cost plus and fixed price opportunities. Our objective remains great neutrality and we continue to make good progress towards that goal. For new KBR. We're building a lean, scalable organization that can support future growth. While maintaining strong margins and disciplined cost management Next, on capital deployment. We continue to allocate capital in a disciplined manner. Investing roughly $190 million in the first half to strengthen the portfolio. While also returning an additional $71 million to shareholders through dividends and share repurchases, bringing total capital deployed to 261 million. We remain focused on maintaining the flexibility needed to support separation, invest in growth and pursue attractive value creation opportunities. In. Short, we're executing the strategy, preparing both companies for a successful separation and positioning each business to create greater value as a focused standalone company. With that as a backdrop. Let's move to slide seven and discuss the business. The demand trends we discussed last quarter. Continue to strengthen during the second quarter, reinforcing our confidence in the long term outlook for sustainable tech. Demand remains broad based across energy security, food security and sustainability focused investments supported by both new project activity and long standing customer relations. Very important. Those.

Market dynamics continue to translate into strong commercial results. Second quarter book to Bill was 1.5 times and trailing 12 month book to bill was 1.3 times and backlog ended the quarter at a record $5.5 billion. And that is up 40%, or 0%, year over year. In addition, our near-term pipeline now exceeds $6 billion, excluding large reimbursable LNG, EPC opportunities, which grew the number significantly Importantly, work already under contract represents approximately 80% of a 2026 revenue guidance midpoint. We're also seeing an increasing mix of OPEC related work. Approximately 34% of year to date bookings were tied to OpEx based contracts, with activity across both the Middle East and the Americas through Brown and Root. These contracts are generally longer in duration and further enhance the durability, visibility and resilience of the business. We remain encouraged by the level of opex related opportunities moving through the pipeline. The Middle East remains a significant growth driver, with first half bookings exceeded $900 million across oil, gas, NGL and energy infrastructure. Project We are also seeing encouraging momentum across our technology portfolio, including our first commercial pure SAP License Awards, and continued demand for our market leading ammonia technologies, including the recent Pampa Energia Award in the Americas.

More broadly, many of these opportunities build on relationships that begin with technology licensing studies or engineering services, and ultimately expanded to larger project execution or aftermarket scopes, creating additional revenue opportunities while improving long term visibility. Taking together, we believe Sdhs remains well positioned for continued growth and provides strong visibility into future revenue and earnings. On to lid eight. Turning to. Mtz. We continue to see strong demand across our defense systems modernization base and global mission operations. Businesses. Our. He remains focused on combining trusted mission expertise. Customer intimacy, and differentiated technology solutions to address some of our customers. Most critical priorities that demand is supported by strong visibility into future performance. Approximately 94% of our full year revenue guidance is already under contract. We have roughly $10.4 billion awaiting award, and we expect more than $25 billion of bid volume in 2026. And that's up approximately 50% year over year, with significant submissions in the second half. Second quarter Victorville was 0.8 times with a trailing 12 month ratio of 1.0 times. Importantly, those metrics do not yet reflect approximately $10.6 billion of awarded work. Currently under protest, including the National Science Foundation, Antarctica Award, the Department of State Award in Iraq and the classified Paycom Logistics Award.

As a. We believe reported backlog and book to bill do not fully reflect the level of awarded work and future revenue visibility in the business today. While the timing of protest resolutions remain outside our control. These are awarded programs supporting enduring customer priorities. More broadly, our success continues to be driven by the mission, expertise and customer relationships we've built over decades. The National Science Foundation, Antarctica Award is a really good example. While NSF was a new customer for KBR. The award reflects several years of engagement, mission understanding, and demonstrated technical capability, highlighting the differentiated approach that continues to create opportunities across the portfolio. We are also increasingly embedding software. AI and digital capabilities into missions. We already support, helping customers modernize operations. Improve decision making, and deliver faster outcomes. We also see opportunities to support emerging priorities such as Golden Dome, where KBR already supports customers across many parts of the broader mission environment. In. Short demand remains healthy across our global market. Visibility remains strong and our differentiated capabilities continue to support long term growth as we prepare to launch this business as a standalone company, we're also taking an important step in establishing its identity in the market Now let me turn to slide nine and introduce the new name for the Mtz spinoff.

The. Name is inspired by the word intrinsic and reflects the essential built in capabilities and deep, deep expertise. Trinsic harnesses the power of technology to support governments, partners, and allies across national security and space. We work at the frontier of what is technically possible, bringing new capabilities to the systems. The world depends on, and giving customers the confidence to act. The tagline for Trinsic is the bold, connected, and I think this captures the essence of the business. Trinsic design solutions that hold up when there is no margin for error, and in environments where critical systems must perform just as. Importantly, Trinsic gives us the opportunity to tell the story of how this business has evolved while our. Foundation remains our deep expertise and trusted performance. Today's Trinsic is increasingly defined by the way it connects people, technology, and critical systems with speed, precision, and rigor. We believe that brand better reflects both the company we are today and where we are headed next. Very exciting. It also reflects a culture built around collaboration, accountability, and delivering results. As we've discussed on today's call, this business is entering its next chapter with strong customer relationships. Differentiated capabilities.

Global reach, and significant growth opportunities ahead. We believe Trinsic reflects both our heritage and our exciting future, bringing intrinsic value and advantage to customers. On to slide ten. We. Due to execute well against our separation plan and remain on track to complete the spin on a target date of January the 4th, 2027. On. Action readiness. We continue to make progress across key regulatory and transaction milestones. We submitted our final private letter ruling request to the IRS in June and expect a final ruling in September. We also continue through the SEC review process for the form ten. With a public filing expected ahead of our next earnings call. Operationally, the work is shifting from planning to execution. IT systems contract bifurcation, procurement separation, corporate budgeting and organizational design are all progressing against plan. Corporate employees have been aligned to their future organizations, and the teams are focused on filling the remaining critical roles so both companies are ready to operate effectively from day one. We are also building out the intrinsic leadership team. Michael Laroche will join as CEO in September, bringing nearly 30 years of experience across defense intelligence, space diver and government services. Like VC joined as CFO designate earlier this month with deep experience across finance, capital markets, M&A and investor engagement.

The majority of the intrinsic leadership team is now firmly in place, and the boards for both companies are taking shape as we assemble the skills necessary and the experience needed to support each company's standalone strategy Looking ahead, we're excited to host Investor Days in New York for both new KBR and Trinsic, where we will outline the standalone strategies. The financial framework and the long term priorities for each business. Overall, I'm pleased to report the separation is progressing well. The Leadership Foundation is taking shape and we have strong visibility into the key milestones required to successfully launch both companies. With that, I'll hand over to Shad. Thanks, Stuart. I'll pick up on slide 12 with our consolidated second quarter results. Revenues for the. Quarter were approximately 2 billion, up 32 million, or 2% from prior year. As a reminder, this was the final quarter lapping elevated Ucan contingency activity in 2025. Excluding that work, revenue increased by approximately 91 million, or roughly 5%, driven by continued ramp up on recently awarded projects across both segments. Adjusted EBITDA increased 16 million to 258 million, with adjusted EBITDA margins expanding approximately 60 basis points to 13%. Performance was driven by strong project execution, favorable portfolio mix and disciplined cost management across the business.

Adjusted EPS increased $0.08 to $0.99. Driven by strong operating performance. Lower below the line expenses and lower diluted share count resulting from our repurchase activity. Turning to cash flow First half adjusted operating cash flow was $183 million, representing adjusted OCF conversion of approximately 74%. As expected. Second quarter cash flow reflected collections timing in Stz Middle East. Collections have started to normalize in July, and our full year outlook remains unchanged over. All. We are pleased with the first half performance. We delivered profitable growth, expanded margins and continued to see healthy momentum across both segments. As we enter the second half of the year Turning to slide 13. I'll walk through segment performance beginning with sustainable technology Solutions. Revenue increased 60 million or 10% year over year to 676 million, driven by continued ramp up of projects awarded over the past 12 months, with particularly strong growth in the Middle East, Latin America, Asia and Australia. Revenue also increased 8% sequentially, reinforcing our confidence in delivering mid-teens revenue growth for the full year. As project activity accelerates in the second half. Adjusted EBITDA was 123 million, down 11 million from the prior year due to Project Mix. This quarter included a higher proportion of equipment procurement activity, which carries margins at the lower end of the framework.

We outlined last quarter. This impact was partially offset by strong project execution and continued healthy demand across the portfolio. Adjusted EBITDA margin was 18.2%, while adjusted EBITDA margin excluding LNG, JV earnings, was approximately 13%. Importantly, year to date, adjusted EBITDA margins excluding LNG, JV earnings remain approximately 14.5%. Demonstrating the underlying earnings power of the business and keeping us on track to achieve our full year outlook of mid-teens. Excluding LNG, JV earnings. Turning to Mission Tech revenues were 1.3 billion. Down 28 million from prior year, excluding. UConn contingency activity revenues increased approximately 31 million, or 2%, reflecting strong activity in Australia and the UK. Partially offset by project completions in the US. Adjusted EBITDA increased 22 million to 158 million, with margins expanding roughly 190 basis points, 12.1% performance benefited from favorable mix, disciplined cost management and benefited from contract Closeouts. Year to date margins of 11.4% remain modestly ahead of our full year outlook. Overall, we were pleased with the segment performance during the quarter. Both businesses continue to execute well, deliver profitable growth and maintain strong momentum as we move through the back half of the year Turning to capital allocation on slide 14. Net. Leverage ended the quarter at approximately 2.3, trailing adjusted EBITDA.

Loss sequentially and comfortably below our 2.5 target as working capital normalizes and cash generation strengthens. In the second half, we expect leverage to continue trending downward through year end We also maintained a disciplined approach to capital allocation. Repurchasing approximately $25 million of shares during the quarter while preserving ample liquidity. As we prepare for separation, we remain focused on positioning both companies with capital structures and financial flexibility needed to execute their growth strategies and create long term shareholder value Overall, we're confident in the strength of our balance sheet, our capital allocation framework and the readiness for both businesses as we move towards separation. On to slide 15. Today, we're reaffirming our full year guidance across revenue adjusted EBITDA, adjusted EPS, and adjusted operating cash flow. The business continues to perform in line with our expectations, supported by strong execution, a healthy demand environment, and strong revenue visibility. Approximately 89% of our expected revenue for the year is already in hand, including 80% for SPS and 94% in MTF. Given our. First half performance and the strength of our backlog, we remain confident in our ability to deliver on our full year outlook. With that, I'll pass it back to Stuart.

Thanks, Shad.

And to wrap up on slide 16, there are four key takeaways from the quarter. First, we continue to execute at a high level across both businesses First half results demonstrate the strength of the portfolio. Profitable growth margin expansion, and solid momentum heading into the back half of the year. Second, demand remains healthy and visibility remains strong across both businesses. We're supported by substantial backlog, significant awarded work, and a healthy pipeline, giving us confidence in both our near-term outlook and our longer term growth opportunities. Third, confidence in the separation continues to build. Transaction milestones are progressing as planned. Operational readiness is advancing, and we're increasingly shifting from planning to execution as we prepare for day one and. Finally, we're positioning new KBR and Trinsic as to focus highly differentiated companies with strong market positions disciplined. Trading models and a clear path to long term value creation for our shareholders. With. That. I'll hand it back to the operator who will open the call for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mariana with Bank of America. Mariana your line is open. Please go ahead.

Good morning everyone.

Morning. Mariana.

So my first question is you mentioned Trinsic is out there. New name. Everything is on track. Even a strong management team designated. Now, you mentioned about like this financial structure and the financial capability for both this businesses to be able to pursue their goals. How should we think about that broadly?

I mean, we are setting both businesses on the right path. Mariana you'll have seen the the book to bill, particularly in SDS, very strong and obviously awards., when you when you link in the what's under protest and Mtsc. I think both businesses heading very strongly as towards the year end with momentum as the as they look to separate., I guess the, the. Whole, the whole piece around where the business is, are,, looking to. To operate as being de-risked as we progress towards the spin date., so that operational readiness was mentioned in the prepared remarks is, is key there. And we continue to progress on all fronts in terms of capital structure going forward. We're very clear that both would have normative sort of leverage ratios for their businesses., given where our balance sheet sits today, I think you can translate that quite clearly. And we've communicated that historically and pleasingly, both,, on a year to date basis are performing at the margins levels. We expected. And our commitment was that we would not distract the core business while we set about the sort of spin separation process,, which in truth is a, is a heavy lift.

So we had a dedicated team,, focused on doing that. And we've made significant progress in both counts, not just with the spin, but actually delivering on the commitment not to distract the business. And I think the underlying performance represents that. But of course, we've got investor days, our capital market days coming up in November that will really be the time where we, I guess, set out our stall in terms of, I guess, the investment thesis for both businesses, which will be different., and, and suitable for the standalone business case. That makes sense.

Great. Thank you. And then on STS or the new KBR., how should we should we think about the volatility of the margins in terms of on a quarterly basis, going forward? Especially as you have like more, I don't know. Pass through materials in a quarter or CapEx versus OpEx ., mix., how should we think about that volatility going forward and the trend from the mid-teens, I don't know, three, five years from now.

Yeah. I think we'll get into the longer term margin profile during Investor Day. But what I'll say Mariana, as it relates to 2026, is the full year margin outlook for STS remains unchanged., the quarterly variability that you see in the PNL this quarter is normal, right? It reflects the sort of project mix, particularly the procurement content that moves through the STS segment in a very normative way., we've seen that pattern very clearly historically. And this quarter is no different., but also say as importantly, this year, the year to date margin performance. Ex LNG equity and earnings is 14.5%, which again, is consistent with our expectations and puts us in a. Wonderful position to deliver on the full year commitments. And STS.

Your next question comes from the line of Ian Zaffino with Oppenheimer Ian. Your line is open. You may now go ahead.

Hey. Good morning. This is Isaac on for Ian. Thanks for taking the questions., my first is just on STS., as far as the awards, you know, in the first half of the year, maybe you can talk a little bit about geographic mix., and maybe specific to the Middle East awards, maybe how that has trended compared to expectations. And if you're still seeing maybe any customer uncertainty,, with. Oil and gas customers at all. Thanks.

Yeah. Good question. And we've seen quite a sort of global mix in our award cadence., I think last quarter, we saw significant awards in the Middle East and we touched on that last quarter., this quarter, if you, if you look at the,, the slides, you'll see. 54% of the awards were actually in the Americas. This quarter.. And that's across a range of,, technology sales. And we announced the Pampa Award in Argentina,, and obviously we've got ongoing work in Mexico again in LNG, but also in the