KBR, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Sustainability: KBR reported an industry-leading health, safety, security incident rate and over 93% zero harm days. 38% of 2024 revenue ($2.9 billion) was allocated to sustainability initiatives. It holds MSCI's top AAA rating and ISS B- rating.
• Revenue and Earnings: Revenue was flat year-on-year but up 5% year-to-date. Adjusted EBITDA was $240 million, up 10%, with adjusted EPS of $1.02, up 21%. Cash conversion was over 130% year-to-date, generating operating cash of $506 million.
• New Contracts: MTS was awarded a $2.5 billion ceiling value base period contract for astronaut health and human performance, and strategic contracts with the Air Force Research Laboratory. STS extended a contract with Basra Oil Co, was awarded program management consultancy services by TAQA, and FEED contracts for Kuwait Oil Co and Indonesia's Abadi onshore LNG project.
• Spin-off: KBR is spinning off its Mission Technologies segment (SpinCo). The spin-off is on track, targeting completion by mid-to-late 2026, with expected benefits including enhanced focus and capital flexibility.

Segment Performance

• MTS: Revenues were $1.4 billion, flat year-on-year. Defense and Intelligence generated 14% growth, Readiness and Sustainment was down 22% (primarily due to Department of War strategic shifts), and Science & Space was down 5%. Adjusted EBITDA was $143 million, with margins at a little over 10%.
• STS: Revenues in Q3 were $525 million, down about 1% due to back-end weighted awards. Adjusted EBITDA came in at $123 million, up 13%, with margins of roughly 23.5% (impacted by proprietary equipment mix but boosted by Plaquemines project milestones).

Guidance

• Revenue: 2025 revenue guidance revised to a range of $7.75 billion to $7.85 billion, with a midpoint of $7.8 billion (flat).
• Adjusted EBITDA: Reaffirmed a range of $960 million to $980 million.
• Operating Cash Flow: Reaffirmed a range of $500 million to $550 million, assuming the government shutdown is resolved in November.
• Spin-off: Progressing as planned, targeting mid-to-late 2026 completion.

Risks

• Government Shutdown: Delays in award conversions, resolution of protests, and impact on MTS revenue outlook due to the shutdown.
• Protests: $3 billion in awards won but under protest, delaying bookings and revenue conversion.
• Market Volatility: Uncertainty in energy transition projects, delays in LNG and petrochemical projects due to market shifts and tariffs.

Question and Answer

• Q: Color on STS going into 2026? A: STS has good momentum, aligned with 2027 CAGR targets, expecting continued growth with visibility into positive trends heading into 2026.
• Q: NASA exposure and impact? A: Little impact in 2025, unclear outlook for 2026; lower margin piece, but human space performance areas offer growth opportunities.
• Q: Interest in spin-off acquisitions? A: No comment on external interest; spin-off is progressing as planned with no disclosed external inquiries.
• Q: STS margins and Plaquemines contribution? A: Margins impacted by timing of milestones; Plaquemines contribution expected to continue into 2027 at a steady run rate, with cash conversion closely tied to profit recognition.
• Q: STS backlog and bid pipeline? A: Near-term bid pipeline is ~$5 billion, impacting backlog over 6-8 months, excluding large one-time projects like Lake Charles.
• Q: Australia and UK pipeline? A: Australia is growing double digits; the UK and Europe market is showing strength, with optimism about increasing demand for services in these regions.