KBR, Inc. Aktie

Welcome, everyone. The KBR's First Quarter 2026 Earnings Call Conference will begin shortly.

Hello, everyone, and thank you for joining the KBR's First Quarter 2026 Earnings Conference Call. My name is Gabriel, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Rachael Goldwait, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to KBR's First Quarter 2026 Earnings Call. Joining me today are Stuart Bradie, President and CEO; and Chad Evans, Executive Vice President and CFO. Stuart and Chad will cover highlights from the quarter, and then we'll open the line for your questions.

Today's earnings presentation is available on the Investors section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements as discussed in our most recent Form 10-K available on our website.

This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our earnings presentation.

I will now turn the call over to Stuart.

Thank you, Rachel, and good morning, everyone. I'll pick up on Slide 4. Now before we get into the results, I wanted to share a brief 0 harm moment on staying connected especially in challenging times. At KBR, zero harm starts with keeping our people informed and supported even when they're hard to reach, whether they're on a remote site, a project location or in an office.

The focus on reaching the unreachable is what led to the launch of the KBR Pulse app. Pulse was not built in response to a crisis. It actually came out of a global employee Hackathon where our teams identified a better way to stay connected across our diverse and distributed workforce. It is employee-driven, built by our people for our people, and it provides easy access to viewers, safety updates and company resources wherever work happens.

When the conflict in the Middle East escalated, Pulse quickly became a critical channel for sharing timely updates on guidance. Most importantly, it helped us stay closely connected with our teams in the region and all of our people have remained safe, supportive and informed. Pulse helps us reach employees who are not sitting at desks and reinforces our ability to act as one team, even in the most challenging environments. It is a practical example of how listening to our people and then investing in the right digital tools strengthens our zero-harm culture and supports resilience when it most matters.

On to Slide 5. Today's call will cover these key topics. Firstly, I'm pleased to report that we started the year well, demonstrating disciplined execution and resilient operators. Secondly, we continue to see demand in our core markets with clear pipeline visibility. Third, we're advancing our planned spin transactions more than that later and thus, sharpening our strategic focus.

And finally, we are reaffirming our 2026 guidance and remain committed to execution, margin discipline and strong cash generation. Moving to Slide 6, where I'll start by covering the STS business. Over the last few quarters, we've seen customer priorities move toward energy security, reliable supply and resilient infrastructure. A more complex geopolitical environment is reinforcing these trends and shaping both capital spending and services demand across our end markets.

With that context, I want to provide a bit of color on where we're winning work today and how those wins align to our strategy and how that sets up the near-term pipeline on the next slide. For the third consecutive quarter, STS delivered book-to-bill ex LNG well above 1.0. Demand continues to be anchored in energy security, downstream reliability and long-duration asset services with a balanced mix of capital projects and recurring services work, supporting growth and improving backlog visibility.

In energy security and transition, customers are prioritizing execution certainty across upstream, downstream and gas infrastructure. This quarter, highlights include project management services for the Zales South refinery in Libya, integrated field management services at the Magino oilfield in Iraq and a long-term general maintenance contract at Sator in Saudi Arabia. These wins reflect continued investment in mission-critical assets where reliability really matters.

In Critical Materials and circularity, we are winning life cycle orientated work that extends asset life and improved performance. During the quarter, we secured a long-term catalyst supply agreement supporting Indorama's ammonia operations alongside optimization work across chemicals and materials assets. In Infrastructure and Transport, we continue to pursue selective program and project management opportunities, including water infrastructure work in the Middle East and sustained activity in Australia across rail, water and defense adjacent infrastructure.

Overall, our bookings reflect a capital-linked engineering and project foundation with selective layering of recurring operations and maintenance services. This deepens our customer relationships and extends our role across the asset life cycle and, of course, improves backlog visibility. We're also adding digital capabilities where they strengthen our role with the customers. Our partnership with Applied Computing supports data-driven and AI-enabled solutions that are expected to connect project execution to maintenance and operations while staying disciplined within our capital light model.

To put this in context with some key metrics, STS first quarter book-to-bill ex LNG was 1.2x, with a trailing 12-month book-to-bill of 1.2x. Backlog ended the quarter at approximately $4.7 billion, and that is up 9% year-over-year. [indiscernible] pipeline, again, excluding LNG, is more than $5 billion was roughly 80% from repeat customers. And work under contract today now covers approximately 67% of our 2026 revenue guidance, which is a good place to be at this time of the year.

The momentum we're seeing in bookings is consistent with the pipeline outlook, which brings me to Slide 7. This matrix shows where near-term pipeline activity is clustering by market and region. It's directional, not a forecast of timing, size or conversion. Stepping back, the pattern reflects 2 core dynamics. First, we are seeing broader distribution of critical programs rather than reliance on single large awards.

Second, customers are advancing work through early engineering and phased scopes, reflecting disciplined progression across project life cycles. From there, 5 themes explain how demand is showing up across regions. First, energy security and resilience in the Middle East. Customers continue to prioritize reliability, redundancy and throughput expansion across critical infrastructure.

Recent geopolitical conflict is reinforcing these priorities with increasing emphasis on resilience alongside restoration and rebuilding efforts were needed. Importantly, we have not seen any material change in capital spending priorities as customers continue to fund essential programs already underway. These tend to move as multiyear programs that award engineering work early, supporting a steady and visible near-term opportunity set. With a strong local throughprint and established relationships, KBR remains well positioned to support customers across the region, particularly as they navigate evolving conditions.

Second, resource security within critical minerals and circularity across the Middle East, Africa and parts of the Americas. Governments and producers remain focused on maintaining and expanding supply of essential inputs particularly ammonia. This includes continued demand for licensed ammonia technology and proprietary solutions with customers increasingly engaged early with engineering-led scopes, again supporting durable near-term booking opportunities.

Thirdly, pragmatic transition activity in Europe. Near-term transition demand remains largely engineering-driven including design, permitting and modularization across key transition value chains. We are seeing particular demand in areas such as sustainable aviation deal alongside policy-driven feasibility and pre-FEED studies as customers assess options and navigate regulatory frameworks.

Fourth, energy security and critical materials across the Americas. Customers are pursuing targeted programs that strengthen energy exports, improve reliability and, of course, support domestic supply chains, particularly across LNG adjacent infrastructure and processing and separation assets tied to critical materials.

And finally, Infrastructure and Transport in Australia. Near-term opportunities remain concentrated in government-funded transport, defense and enabling infrastructure programs with a strong emphasis on alliances, framework [indiscernible] and stage delivery models. Work is predominantly engineering, PMC and early works rather than full greenfield execution, which supports recurring capital light bookings and reflects customers' focus on resilience, capacity expansion and program continuity.

Overall, the Matrix reinforces the STS bookings, a near-term pipeline are diversified and concentrated in stage programmatic work aligned with resilience and resource security priorities. And this plays directly to our engineering-led, capital-light model and repeat customer relationships.

Now on to Slide 8 for the mission tech business. As we've discussed over the last few quarters, awards are not flowing at historical levels. In this environment, our focus remains on what we can control, increasing both the volume and quality of our bid activity, expanding access to IDIQ vehicles and continuing to position the business for future awards. While several larger opportunities remain pending, and, in some cases, under protest, we continue to win work that aligns with our core capabilities and the government's most enduring priorities.

Recent mission tech wins reflect a consistent set of strengths. We are buying digital engineering and analytics to help accelerate time lines, leverage AI and data-driven insights to support higher confidence decisions, and delivering trusted execution in mission-critical environments. In space and national security, we won new work supporting the U.S. space force, applying digital engineering and analytics to help accelerate the development and deployment of next-generation space capabilities.

We also secured a new role, providing direct data and analytical support to senior defense leaders focused on translating complex data into actionable insight for critical decisions. On the civilian side, we were awarded a recompete with the Department of Transportation's, [indiscernible] Center extending a long-standing partnership focused on using AI, analytics and systems engineering to modernize transportation and improve safety.

And lastly, we secured contract extension under the Army's LOGCAP program, reinforcing KBR's role supporting the U.S. military with mission-critical logistics and sustainment in complex operating environments.

Before moving on, I wanted to briefly address what we're seeing at NASA. KBR has supported NASA emissions for more than 60 years. And recently, the administrator has indicated an interest in in-sourcing certain core workforce competencies. If implemented, these changes would affect the mix of work across some programs and that impact is reflected in our 2016 outlook, which Chad will discuss in more detail as we walk through the guidance.

Importantly, KBR continues to support NASA in areas with deep mission experience, independent technical expertise and operational continuity are essential. We are very proud of our team's contribution to the ARTEMIS 2 mission and have a decades long service to the agency. As you'll hear from Chad, these emission tech dynamics are being offset by strength in sustainable tech, so the impact is primarily mix as we reaffirm our full year guidance.

Stepping back and looking across the portfolio, recent wins reinforce where MTS is differentiated. We operate in mission-critical environments that demand speed, technical debt and trusted execution with digital and data capabilities playing an increasingly central role in mission success. So to put this in context with some key metrics, MTS' first quarter book-to-bill was 1.0 with trailing 12 months book-to-bill of 1.0. Backlog and options ended the quarter at $18.5 billion, with 39% of that funded, excluding the PFIs.

Bids and waiting award totaled $16 billion and work under contract now covers approximately 91% of our '26 revenue guidance. And we continue to make progress towards our bid volume goal of $25 billion in 2026 with significant submissions expected in the next 2 quarters.

With that, I'll turn to Slide 9 and our near-term pipeline opportunities. This slide provides a directional view of where we see the MTS near-term pipeline forming across markets and customer sets. It is not intended to indicate precise timing, size or conversion, but rather to highlight where demand is clustering based on our current visibility. We see 2 core dynamics shaping the pipeline. First, customers are prioritizing a more selective set of enduring machine-critical programs with long-term relevance and funding durability, a trend evident across U.S. and allied defense markets, including Australia.

Second, we are increasingly valuing partners who can integrate across the [indiscernible] and translate software and data-driven architectures, into operational capability at speed. Those dynamics translate into several clear demand themes across the portfolio. First, national security space and space mission operations with programs award technical debt and integrated delivery from digital engineering through operations. This includes long-standing work supporting the U.S. space forces, military satellite communications mission on related space architecture.

Second, integrated air and missile defense, including counter U.S. and directed energy. Here, customers are prioritizing layered, scalable solutions that reduce cost per engagement. Our role centers on integrating new capabilities into existing architectures, so customers can field solutions faster and, of course, more affordably. Third, connected balance pace and Decision advantage as customers invest to compress decision cycles by linking senses to decisions at the edge. We are supporting architecture and integration efforts aligned with JADC2 objectives, including work related to the Air Force bottle network.

Finally, we continue to see durable demand in readies sustainment and deployed mission support, including Allied life cycle programs. These missions place a premium on reliability, scale and end-to-end accountability, and we're increasingly applying AI-enabled tools, including through our partnership with tag-up AI to help improve sustainment workflows and readiness outcomes. Across these areas, the common thread is customers prioritizing speed, integration and measurable mission outcomes, areas where MTS is positioned to deliver.

On to Slide 10 and an update on the spin. Next, I'll provide an update on the tax rate spin of MGS, which remains central to our strategy and to sharpen focus and, of course, create long-term shareholder value. The strategic rationale for the separation remains unchanged. This spend reflects the culmination of a decade-long portfolio transformation and will result in 2 independent pure-play companies with clear strategic focus, distinct investment profiles and dedicated leadership aligned to their end markets.

As part of this process, we evaluated all strategic alternatives and concluded that a spin is the right path to unlock value and position both businesses for long-term success. We are executing on this path while ensuring the separation is completed in a way that protects continuity, minimizes risk and positions both companies for success from day 1. We continue to believe a quarter end spend is the most practical approach both operationally and financially. And given the scope and complexity of separation, a fourth quarter time line provides additional runway to address these complexities. As a result, we are working toward an effective spin date of January 4, 2027, so the first business day of fiscal '27.

On the regulatory front, we have confidentially resubmitted our Form 10 including the fiscal 2025 audited carve-out financials. We expect continued confidential refinement through the SEC review process before transitioning to a public filing, which we currently anticipate in September. In parallel, we're advancing the IRS private letter ruling process to support a tax-free transaction. From a leadership standpoint, we are now well advanced on talent migration. The MTS CEO set is in its final stages, with Board interviews plan for later this month. And the CFO process is expected to follow shortly thereafter.

At the same time, additional leadership and functional appointments are beginning to be announced across both organizations, helping to build clarity and momentum. Operational separation continues to progress. We have completed the IT standup project plan and are now executing against it, supporting coordinated separation across systems, processes and controls. And in parallel, teams are advancing real estate and legal entity rationalization to position both companies to operate independently at close.

Looking ahead, we plan to host 2 Investor Days in the second week of November. These events will outline the stand-alone strategy, operating models and long-term priorities for both the STS and MTS businesses ahead of the transaction close. Overall, the dedicated spin transaction team remains fully engaged across all work streams and coordination across the organization continues to build reinforcing our confidence in execution.

With that, I'll turn it over to Shad.

Thanks, Stuart. I'll pick up on Slide 12 with the consolidated first quarter results. We started the year with solid momentum despite a challenging backdrop. Revenues declined $95 million year-over-year, driven primarily by the planned reduction in EUCOM contingency, as outlined on our last call. Excluding EUCOM, revenues were largely consistent with prior year, and we did not experience any material impact from the Middle East conflict during the quarter. Despite lower revenue, adjusted EBITDA increased by $3 million year-over-year. supported by strong program execution and favorable mix across the portfolio. As a result, adjusted EBITDA margin expanded to 13.1%, up from 12.3% last year. .

Adjusted EPS was $0.96, down $0.05 year-over-year, primarily due to higher financing expenses from unconsolidated joint ventures. This was partially offset by lower average shares outstanding following open market repurchases throughout 2025. Cash flow was a key highlight for the quarter. Adjusted operating cash flow totaled $119 million, up $28 million year-over-year, reflecting strong DSO performance and resulting in 98% adjusted OCF conversion. Overall, the quarter reflects disciplined execution, margin resilience and strong cash generation, even as revenues were impacted by known and anticipated program dynamics.

On to Slide 13 for segment performance. Results this quarter demonstrated solid execution and performance was in line with expectations across both sustainable tech and mission tech. Starting with sustainable tax revenues were down $10 million year-over-year, primarily reflecting new awards that are still ramping and have not yet contributed meaningfully to revenue. Adjusted EBITDA increased by $2 million year-over-year with margins expanding approximately 70 basis points to 21.9%, driven by equity and earnings contributions from an LNG project.

Excluding this project, underlying margins in the business were 16.1%. Turning to Mission Tech. Revenues were down $85 million year-over-year, driven primarily by the planned reduction in EUCOM contingency work. Excluding EUCOM, Mission Tech revenues were in line with prior year with the growth in the U.S. and Australian defense programs, offset by the combination of award delays, protest activity and funding restrictions at NASA. Adjusted EBITDA was essentially flat year-over-year, declining $1 million, while margins expanded to 10.6%.

Margin performance reflected the roll-off of lower EUCOM work continued disciplined execution and increasing mix of higher-value offerings. Overall, segment results reflected solid execution, expected mix dynamics and continued focus on disciplined margin management across both businesses.

Turning to Slide 14. As we committed last quarter, this slide breaks out the underlying sustainable tech margin structure separating the LNG project and showing how the broader portfolio is positioned as that project rolls off and our JV footprint expands over time. As you see on the left, you can see the margin tiering across the STS portfolio. Higher margins are driven by technology licensing and differentiated engineering while international OpEx services, PCM and proprietary equipment fit in the middle. At the lower end is domestic maintenance, which we primarily access through our recurring JV structure, including breast, allowing us to participate with appropriately managed risks and returns.

As shown on the right, that mix supports a 20%-plus weighted STS margin profile in 2026 driven by technology, engineering and JV participation. Over the last several years, growth in our services business has outpaced technology sales, resulting in margins of approximately 15% with the LNG project adding an incremental 500 basis points. Importantly, the backfill of this LNG project is portfolio based rather than a 1-for-1 replacement. As that project rolls off, growth in higher margin and more recurring streams, particularly technology licenses and JV OpEx work support a more durable margin profile over time.

Overall, this slide reinforces the STS margins are structural, supported by deliberate portfolio shaping, disciplined program selection and contract structures that align risk and return.

With that, let me turn to Slide 15. As mentioned earlier, cash generation was strong in the quarter. particularly given the fact that the first quarter is typically a low cash flow period for us. That performance reflects disciplined execution and the underlying cash generative nature of the portfolio. Net leverage increased modestly following our investment in Bris to fund the SWAT acquisition, ending the quarter at approximately 2.3x trailing adjusted EBITDA that remains comfortably below our stated ceiling of 2.5x and maintaining that leverage discipline remains a key guardrail for us. More importantly, our approach to capital allocation remains balanced and disciplined. We continue to invest for growth, return capital to shareholders, maintain prudent leverage and incorporate the expected cash outflows associated with executing the spin-off transaction.

Overall, our strong cash generation provides flexibility across these priorities and supports disciplined capital deployment going forward. On to Slide 16 and full year guidance. Today, we are reaffirming our full year guidance and range across all metrics. Within that framework, we're operating in an environment where the range of potential outcomes is wider than normal for our government services portfolio. Geopolitics and policy shifts across the U.S. and Australia can create both opportunity and funding risk and those factors are influencing how demand flows across the portfolio.

Building on Stuart's comments, the dynamics we're seeing are reflected primarily in segment mix rather than a change in our full year outlook. In Mission Tech, we expect revenue to be flat to modestly down year-over-year, largely reflecting unresolved protests in the first half that delayed anticipated ramp activity. Those impacts particularly related to the MIS contract are timing driven. And we feel good about the underlying award and the transition profile as regional disruptions get resolved. In addition, given the uncertainty around potential program level changes at NASA relating to the workforce directive Stuart referenced earlier, we have incorporated a modest second half decline, assuming those changes are implemented.

These impacts are more than offset by strong performance in sustainable tech, where we now expect to deliver mid-teens year-over-year revenue growth. driven by award momentum and elevated service demand. Taken together, this results in revenue phasing of approximately 47% in the first half and 53% in the second half, reflecting a relatively stable mission tech run rate and second half growth in sustainable Tech as customer activity normalizes and recent wins ramped, particularly in regions impacted by the Middle East disruptions.

Importantly, there are no changes to our adjusted EBITDA, adjusted EPS or adjusted operating cash flow guidance. However, we may see some volatility in adjusted operating cash flow during the second quarter as the Middle East conflict is resolved. Our underlying assumptions remain consistent with what we outlined on our last call with today's puts and takes reflected in segment mix rather than a change in our overall outlook.

With that, I'll pass it back to Stuart.

Thank you, Shad. On to Slide 17 to wrap up. There are 4 key takeaways from the quarter. Firstly, we delivered a solid start to the year with disciplined execution, resilient operations and continued margin and cash focus. Second, demand in our core markets remains durable, and we have clear visibility, work under contract today now covers approximately 67% and of our 2026 revenue guidance in STS and 91% in MTS.

Third, we continue to advance our planned spin transaction with key milestones progressing as we prepare for a targeted distribution on January 4, 2027. And finally, we are reaffirming our 26th guidance ranges, and we remain committed to execution, margin discipline and strong cash generation. We appreciate your continued interest and support, and we look forward to updating you on our progress throughout the year.

With that, I'll turn it back to the operator for Q&A. Thank you.

[Operator Instructions] Our first question is from Adam Bubes from Goldman Sachs.

Margins in the quarter, I think, 13.1%, appears modestly ahead of your expectations, and it's above the full year guide. I recognize that equity income can drive some quarter-to-quarter margin noise. But can you just help us parse out what came in better than expected on the margin line this quarter? And anything we should keep in mind when thinking about the trajectory of margins and equity income through the balance of the year? .

Yes. So I'll take that one, Adam. Again, as you point out, margins remain in line with our long-term targets with 10% plus for MTS and took a 20% for STS through 2026. We do expect continued contributions from the LNG project to continue into early '27. And we'll be kicking off our 2027 budgeting process here shortly, which will, of course, have the stand-alone costs for corporate structures and margin expectations for both businesses that we really look forward to highlighting in Investor Day in November.

And then can you just help us think about the Brown & Root equity income contribution on a run rate basis following the SWOT acquisition? And maybe can you talk about the magnitude of the M&A pipeline for Brown & Root, what's your vision for that piece of the business in the medium term?

Sure. I'll take the first one, and then Stuart can cover the M&A piece. So as you'll see on our website, in the fact sheet, the recurring joint venture contributions generated approximately $18 million of EBITDA in the quarter, and we expect that contribution to tick up modestly as the year progresses. Strong year-to-date bookings really begin to ramp in that portfolio, and that will provide incremental volume in the back half of the year.

And on the M&A pipeline, we continue to not sit in our hands. We continue to look at opportunities that will take us both into new geographies and into all reasonably adjacent industries. And I guess more to come on that as we look forward, there's plenty of opportunity. We need to be very disciplined in the way we look at that, both from margin accretion and fit and obviously, values and culture perspective, but certainly more on the table to look at as we go through the year.

Our next question is from Andrew Kaplowitz from Citi.

This is [indiscernible] on behalf of Andy Kaplowitz. I guess first question will start off with just on the margins on SCS margins, like I appreciate the call out on margin XLN this quarter. But could you help us think about the underlying margin profile ex LNG and the margin trajectory going forward or over time? And as compared to your long-term framework and you're like 20% plus margin as well. .

So as promised, we gave more transparency into the buildup of the margin profile within SDS and contribution that comes from the lock project in equity and earnings, and hopefully, that's been useful. In the quarter, ex that project, we made 16.1%. I think that was in Shad's prepared remarks, -- and so the circa 15% that we put in that slide generally is the mark for the base business as we look forward and ex that LNG project. .

Now that could change over time if we do win something with that sort of commercial construct, but hopefully, that gives you a good indicator of how this business performs. And we've got in file just to add to that, we there are margin expansion opportunities on mix, particularly around technology, where you can see in that breakdown where the margins in that business are well in excess of 20% in truth. And the more we do in licensing. And I guess, they're sort of initial sort of engineering, the better for margins. And the timing of that is difficult to predict. So you get some [indiscernible] -- and the more we grow the operational OpEx side of the business under brisk, which is obviously part of our strategic push. Obviously, that comes through equity and earnings, and you'll see that growing stronger as the year progresses, which again is good for margins.

Got it. That's helpful. So underlying margin ex LNG still see creeping up over time to that 20%-plus range.

Well, 15 going upwards, I would say.

Our next question is from Jerry Revich from Wells Fargo.

Yes. I wanted to ask on NASA. Can you just talk about what the ebbs and flows look like from a booking standpoint, there's been volatility between the President's request and Congress reinstatement of funding. Can you just talk about how that has impacted timing, if at all, for you folks and what we should be looking for in terms of booking and activity levels over the remainder of the year?

Yes. The main comment, Jerry, on NASA related to the new administrators push for greater in-sourcing. So effectively moving people who are on contractor staff back on to government payroll that is being discussed and being looked at today, and we think that may or may not happen over the next little while, but certainly, if it does, it will be gradual. But we did call that out in the call. That's a recent event in the quarter. In terms of the scale of that to KBR, it's 50 million, 60 million or so through the course of this year that happened today. So it will be a lesser impact than that likely. So that's really the discussion there in terms of the broader impact to NASA budgets, we're not seeing any real issue there in terms of what's happening in terms of the levels of service and the commitment to funding that we've experienced over the last little while. So that feels pretty steady at the moment.

And separately, can I ask on STS just to unpack the prepared remarks, it sounds like you folks feel pretty good about the ability to backfill to replace the LNG project. Can we just expand on that conversation? How much visibility do you have on replacing that project in the earnings power of STS '27 versus '26 and then you had really favorable project closeout performance in the quarter, which was great to see. Can you just help us quantify that and help us understand in '26 are we trend line level of closeouts, higher or lower, just to give us context as we start to think about the bridge into '27?

Jenny, you've followed us for quite a long time now. You know that we are prudent as we look at project accounting, we don't want to surprise to the downside. So we manage that carefully and prudently. So there are always ongoing favorable project. There was a so nothing unusual there. And I'm sure that will continue into the foreseeable future as long as we continue our current practice, which we will do. .

In terms of bookings momentum, third quarter in a row of very strong bookings for STS, 1 point, well over 1.2 and across that spectrum with a significant pipeline of opportunities that gives us really good confidence about continued momentum in that bookings profile and the growth that comes with it effectively. We are ramping up new awards as we announced those awards in late last year and early this year, and those projects are ramping up right now. In fact, with new risk people coming on to KBR's books in over a couple of thousand people [indiscernible]. And so we're starting to see really strong cadence there.

We started this quarter pretty well. We're only a month in or so, but it's been a solid start to this quarter also and the pipeline of opportunities, we tried to give you color as to where that activity is in the slides and the different mix of drivers that are driving those awards, and we expect to see that to continue to -- it's a global operation with a very strong footprint in areas where there's a strong commitment to funding and project development driven by whether it be energy security, food security, energy transition or what's happening in critical infrastructure in minerals. So again, we're feeling pretty good about that and feeling very confident in terms of the ongoing performance of the STS business.

Our next question is from Ian Zaffino from Openheimer.

Great. Would you guys be able to give us a little bit more color on kind of the Middle East bookings. How is that going? What's kind of the current environment? And I guess if we kind of stick on that a little bit with on the MTS side. How do we think about maybe the U.S. reducing NATO exposure or the troop movement. Would that be somewhat of an impact to you guys? Or how do you think about that as well?

Okay. So let me start with the Middle East and STS mainly because I was there last week for a visit and went to Saudi and Bahrain and into Abu Dhabi and Dubai to visit our folks and all the key customers there. I have to say I was really uplifted with that visit think the resiliency and just the commitment was absolutely amazing. I think the customers really appreciated that we have performed all through this volatility and management, we're actively supporting and doing the right thing for our people, but they were doing the right thing for their customers. We have seen no slowdown in activity. Our ambition and our desire to staff up work that we won in Saudi continues without really interruption, similarly in what's happening in Qatar and the Abu Dhabi businesses continue to grow as does Dubai in terms of what they are doing.

So really all up a really positive visit with strong award cadence and ongoing performance. So there's obviously richness and being on the ground and with the sort of delivery reputation and the capability set that we have locally as well as being able to support that internationally [indiscernible] as well as we look to support those customers as they look to do restoration and repairs and really sort of look at their long-term strategy of lessons lent through the war, if you like, in terms of things like protection of critical areas that some of the the sales track were very targeted in critical areas like operations rooms and things like that and how we can provide more resilience or sparing into existing facilities, but also looking at whether there should be additional export routes and things like that, so that they're not so handcuffed as they are today.

So I think lots to do there and very positive about the outlook in the Middle East. Turning to your sort of last question on what's happening with the activity in Europe and recently all over the press about reduction in Germany, I think there's 2 pieces just to put in context. I think that it's about 5% of the overall strength in Europe is that number. And I think some of that may well have been encapsulated in some of the planned drawdowns already. We're not expecting any material impacts to our business as a [indiscernible].

Okay. And then just as a follow-up, as far as timing, what was kind of the -- it looks like it's a little bit behind schedule. What was driving that? And maybe any other color you could give us as far as -- because I know in the past, you talked about giving us more detail at the Investor Day, but that now seems to be delayed a little bit. So how are you thinking about delivering maybe that information to us maybe at the same time that you had thought even though there's not an Investor Day? And maybe any other type of color you would think about delays with the spin, et cetera.

Yes, I'll give you a little bit of color there. We've made good progress with the regulatory piece in the spin -- the discussions with the SEC and IRS have been highly constructive. And so we're feeling good about that. And I gave an update on how we're doing with people and sort of people transitions and obviously bringing the new CEO in, et cetera. So I'll try to cover all that in the prepared remarks. So that is progressing very well.

We were targeting around like Q3 for the spin originally. So I think October and when we started to look at this when you think about accounting, if you think about benefits and salary adjustments, et cetera, it makes it so much more sensible and logical to do this at the beginning of a fiscal year when all that lines up. And also in truth, it also builds in a little bit of float into the schedule as we work through IT complexities and things like that, that I've never seen an IT project finish on time anywhere really.

I don't know if anyone has -- so having a little bit of flow in there means that we mitigate any risk of being able to operate as 2 independent entities with [indiscernible] systems and things. So nothing more sinister than that. And obviously, by moving that date it makes more sense to hold the Investor Days closer to the actual spin, so the data is more relevant in Pim's top of mind, if you like, as they're looking to separate and then when you kind of work back from that or everything else lines up in terms of the public filings and things like that.

So again, nothing sinister. We committed to giving more color as we've gone through the year as we've done in this earnings call in truth about the breakdown of STS and how that operates and the performance associated with that. And we'll continue to build on that as we go forward. So it does not [indiscernible] between now and Investor Day. We won't tell you everything or we point the tubing Investor Day, but we will give you more color as the year progresses and I commit to doing it.

[Operator Instructions] Our next question is from Mariana Perez Mora from the Bank of America.

So my first one is a detailed one, and then I'll follow up with more of an end-market growth one. On the first one, could you please measure how large was the close out at STS?

So on the closeout piece, as Stuart covered, these are pretty recurring items in the business, as you know, Mariana. And so it would it probably wouldn't be appropriate for us to detail the specific counterparty or nature of the reserve release, but what I'll say is we're really pleased to reach a resolution in the quarter, which was consistent with our expectations.

Okay. And then when we think about all these like moving pieces, right, in both markets, the pipeline, but then like the joint ventures you are having the opportunities in the Middle East and everything on STS. And on the other side, MTS also having opportunities but also headwinds from NASA and the European Command involvement. How should we think about like next couple of years or 3 years growth trajectory.

That really is an Investor Day question, I think, Mariana, and I'm not trying to. But I would say that from an STS perspective, where we're positioned, I commented earlier on the pipeline and the lack of concentration risk in terms of the global nature of that business and the drivers and market drivers that are driving that sort of those global opportunities. So I think you can see from that, that there will be a change in thought processes around food security just given what the impact has been from the Middle East, I think similarly in energy security also, and we're well positioned to take advantage and help our customers think that through.

In terms of MTS very much focused on quality of earnings and positioning the business where we feel the funding is going to flow opposite the priorities of today and tomorrow. And I think you'll have seen that coming through in the awards, particularly on data and digital and AI solutioning that really helps speak to mission data analysis to help sort of decision-making and really that sort of impact to mission that is really at the front of the agenda of the Trump administration.

So -- we're seeing that across space force, [indiscernible] Defense, connected battlefield, electronic warfare, et cetera. So -- and also our probably our most best-performing business in the last quarter in that sense has been in the intelligence side of what we do, including space intelligence. So I think that's going to be the key thematics that are going to endure over the next couple of years unless the sort of presidential funding request for a substantial increase in defense spending. I think that those are the areas where you're going to see the greatest demand. And I believe KBR is very well positioned and have been positioning in that area for some time. This is nothing new. We've talked about it many times and the Lyncus acquisition, et cetera, kind of doubled down on that strategic positioning.

So we feel pretty good about the growth opportunities over time. I mean, part of the rationale of the spin is exactly that to get focused in on these growth areas with 100% leadership focus and making sure that we're building capability as things evolve and also able to deploy capital in a very focused way. So I guess more to come on the actual targets. But over the medium term, we're feeling really good about both businesses and their prospects.

Perfect. And I have one more because -- sorry, -- you mentioned in the prepared remarks, you were doing like this, like separation works already like is progressing? And just mentioned MTS has really strong like high growth businesses and verticals. As you do this exercise, are you open to [indiscernible] sell some like parts of the business or that's going to be an effort that will be done whenever MTS is a standalone cost.

I mean you can never say never if someone comes over the hill, if you like, and makes an offer, we would have to look at that from a shareholder value perspective as we do with any offer across the KBR portfolio or KBR as a whole or whatever, we would look at shareholder value is the north star in that review. But as we sort of said about the positioning of this business where it is today, in our minds, unless something does happen from that field, which we'll be open to, but right now, we are heading towards the businesses as they are today separately.

Our next question is from Tobey Sommer from Truist.

I wanted to ask a question on STS with the war and elevated petrochemical prices, how are -- what are you hearing from customers? And how are they planning anybody -- are they planning for prices to remain high and therefore, get into development? Does the impact direct physical impact of the war, facilitate a better medium or long-term outlook for KBR in the region? If you could speak to those questions, that would be great.

So from a petrochemical perspective and really an oil price perspective, I think that's -- these are moments in time, I think, Tobey. Ultimately, the fuller market dynamics are in a normal trading environment would be similar to what they were pre-war. So I don't think there's going to be a massive expansion in petrochemicals or anything as a consequence. The asset base that's there will be in the case of the Middle East, if it's damaged and any that will be repaired. And if it's not, it will be, I guess, the the asset while the pricing is high, which obviously leads to greater maintenance services and things which fits our strategy very nicely.

In terms of the broader Middle East, their stated objectives over time will be far more driven to I guess, security of supply and making sure they've learned a lot of lessons, as I covered earlier as a consequence of the war. But at the meantime, doubling down on things like [indiscernible] security and doubling down on really gas is really the main driver in the development cycle in the Middle East for the next little while rather than petrochemicals per se. So -- and I think we're very well positioned in all of those areas to assist and to add value to our customers with an increasing focus on digital and AI solutioning, and we covered a bit of that in the scripted remarks as well as the how we're moving firmly in that direction. So we're feeling good about the long-term opportunity or even medium-term opportunities in the Middle East, but more broadly from a global perspective and STS to be fair.

And then if I could ask you to expand a little bit on NASA, what elements of your exposure there are growing and see strong demand signals and then maybe a little bit more granularity on where the weakness is within the portfolio, either a functional or some other basis? .

I mean the primary -- I mean, certainly, with the success of the [indiscernible] 2 machine, which we are very proud of. Our people were instrumental in the success of that mission. So really human space flight is where we're seeing where the activity is. And as you know, we're firmly engaged in across that spectrum, and we've talked about that many, many times. I won't go into it again. So that's the key element for us, and we expect that to continue. And as we move on to Artemis 3 are putting boots in the ground, that's obviously something we'll be heavily engaged in. So across both what we do technically and from a human health performance perspective. So -- that's probably the best way to answer that.

The softness, if you like, when it comes down to the uncertainty on these people moves that we covered earlier, it really only affects one main contract of ours that's an industry-wide directive not targeted in any way at one particular company. It's changing or evolving strategic move by NASA that's still got to play out in truth. And as I say, it really only impacts one element of our contractual base. So reasonably contained but in the spirit of transparency, just calling it out as we move through the course of this year. So really, that's [indiscernible] in space light is the key thematic and we are every engaged in that area.

Our next question is from Steven Fisher from UBS.

Congrats on managing a tricky environment. Just Stuart or Shad related to the guidance. I think in the past, you've been prudent or cautious to raise guidance in the first quarter. But with the solid start, are you perhaps kind of trending above midpoint and leaning towards upper end? Or do you think this year, there's sort of just too many uncertainties going on with some of the things you mentioned in NASA and the Middle East and the separation to kind of call any directional trend at the moment? .

Doing well in the quarter and being above consensus is a good start, I think, to the year, Steve, and not just one metric across all metrics, of course, is terrific. Our bookings are really solid, as we described, and we're feeling good about the year ahead. But as as is normal, we are not known for raising guidance in Q1, and we've proven that again today. But you're quite right. I mean, let's face it, if you just step back and think about the world at large, there are still significant volatility and to get out over your skis right now, would not generally be viewed positively. We don't think by market nor is it prudent for us to do so. So just bear with us, I think.

Fair enough. And then on the STS side, just in terms of kind of pace of progress and status of projects that could potentially move forward into something more materially. I guess, I'm curious to what extent you have, say, completed engineering on some bigger projects that are really just kind of pending FID. Or are we still sort of embedded in sort of very early stages of projects? And if you are towards the latter stages, what are the conditions you think that are needed to kind of move ahead on some of these projects? .

So we try to be very choosy about what we get engaged in, making sure there's -- it doesn't always work out as you know, but trying to be very considered about where we point our reserve base and the chance of that project actually going forward. Today, we're engaged in front-end designs for the LNG projects. We're engaged in [indiscernible] commitment, I think, beyond some of your conceptual early sort of estimate it to sort of put good money into making that definition a bit tighter. So we feel that those projects have lags.

And then on the broader pipeline itself, it's engaged, I believe, with a level of maturity in terms of our understanding of the need for those projects to go ahead and the drivers to do so and the funding flow that will support them. So in terms of the pipeline that we've put forward, we feel pretty good about the the enduring nature of the STS performance as a consequence. That's probably the best way to describe it, Steve. So we're not sort of betting the farm on early concepts or early engagements, thinking some huge project is going to come as a consequence of someone's good idea. We're actually basing our positivity and outlook on maturing projects across the globe, as I said before, with these energy and food security sort of drivers that ultimately, we believe will come into fundamental revenue generation for KBR.

We currently have no further questions. So I will hand back to Stuart for closing remarks. .

Okay. Thank you very much. And -- so a few final thoughts, I guess. You've heard today, our strategy and priorities are clear and some good questions around the dynamics there, we're operating in markets where our capabilities are highly relevant. I think our customer relationships are really deep and that really plays to our advantage. And our model is really designed to deliver disciplined execution across a range of operating environments, and that drives the resilience of what we do. And I think you're seeing that coming through in the numbers.

Across sustainable tech, durable demand tied to energy security, resource efficiency, and resilient infrastructure and their engineering led, technology-led, capital-light approach and growing mix of recurring services and other key thematic continue to support backlog visibility, strong margin performance and resilience and cash generation.

In Mission Tech, the near-term award environment remains uneven, [indiscernible] describe it. the underlying mission priorities we support, we do believe, however, are enduring, had a good question on that during the call. And we remain focused on increasing our bid volume and importantly, the quality of earnings associated with that bid volume and really expanding access through contract vehicles and positioning the business to convert opportunities as funding and award activity normalizes and the recent executive order looking at more fixed price within the government environment is something we really welcome. We've got a strong commercial acumen through KBR, and that plays well to our strengths.

And importantly, none of this will happen without our people. I want to thank our employees across KBR for their amazing resilience and commitment. Nothing more so than the Middle East recently, and particularly as they continue to deliver for our customers in complex and of course, in some cases, really challenging environments. The focus on safety is paramount, and they deliver a focus on execution excellence and teamwork is central to our performance and a key part of our culture.

And finally, we continue to execute the planned separation of the 2 businesses with discipline and real intent and the spin is designed as we've said, to sharpen strategic focus, aligning each company with its end markets and ultimately position both organizations to pursue their long-term objectives with quality and accountability. So thank you again for your time. Thank you for your continued interest in KBR, and we look forward to speaking with many of you soon. Thank you.

Thank you, Stuart. This concludes today's KBR's First Quarter 2026 Earnings Conference Call. Thank you for joining. You may now disconnect your lines.

Good morning, and good afternoon, everyone. Well, thank you for joining us for KBR's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Drew, and I'll be the operator on the call today. During the call after the prepared remarks, we'll have a Q&A session. [Operator Instructions]. With that, it's my pleasure to hand over to Rachel Goldway, Head of Investor Relations, to begin. Please go ahead when you're ready.

Thank you. Good morning, and welcome to KBR's Third Quarter Fiscal 2025 Earnings Call. Joining me are Stuart Bradie, President and Chief Executive Officer; and Shad Evans, Executive Vice President and Chief Financial Officer. Stuart and Shad will provide highlights from the quarter and full year and then open the call for your questions.

Today's earnings presentation is available on the Investors section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties and that could cause actual results to differ materially from these forward-looking statements as discussed in [indiscernible] recent Form 10-K available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measures is included at the end of our earnings presentation. I will now turn the call over to Stuart.

Thank you, Rachel, and good morning, everyone. I will pick up on Slide 4. As we always do at KBR, I want to start with a brief zero-harm moment. In 2025, we delivered industry-leading safety performance with our TRIR reaching an all-time low of 0.033 and zero-harm days reaching an all-time high at 96%. These results really reflect strong discipline and accountability across our operations. More importantly, we speak to the culture we've built inside KBR.

We focused on creating an environment where people look out for one another and we are safety and well-being are part of how we operate every single day. That culture is especially important as we move through the spin and that underpins the execution and results will walk through today.

On to Slide 5. Today's call will cover the profit. First, I'll start with how we delivered our strategy in 2025. From there, I'll touch on why we see improving momentum and visibility as we move into 2026 and across both segments, including how the quality of our earnings continues to improve. It's really important. I'll provide an update on the spin itself. And finally, Shad will walk through our financial performance for the year and, of course, our guidance for 2026.

On to Slide 6, Our Strategy. So as we enter the year, I want to start with a simple message. We executed our strategy in 2025 despite a very challenging award environment across both segments. We stayed disciplined, focused on what we can control and made meaningful progress across each of our strategic pillars.

Firstly, Thrive and Expand. In sustainable tech, we continue to expand globally with particular momentum in the global side. We have heard us say that before. We also made deliberate progress doing our OpEx-facing businesses both organically and inorganically. And this, of course, reduces our exposure to CapEx cycles. The Smart acquisition within our Brown & Root joint venture, [ Breeze ], which closed in January was a key milestone more than doubling the EBITDA of that business.

In Mission Tech, we continue to leverage contract vehicles, including recent Air Force and Space Force awards, which you have seen while expanding internationally and strengthening our presence in Washington, and that's the deep engagement with both the administration and the Pentagon. Second, to deliver innovation. Innovation remains central to our strategy. In Sustainable Tech, we launched Insight 3.0 this quarter through a new venture with applied enhancing operational performance across KBR licensed ammonia plants using physics-based AI.

We also continue to advance Mura and other technologies as a long-term growth platform. In Mission Tech, our focus on deepening customer relationships and advancing our technology road map is paying off. Recognition as a top 10 Australian defense contractor, the Nova Excellence Award from NASA and the recent Golden Dome Shield seat all reflect this progress. Post Linquist, the establishment of a new Chief Technology Officer role and our digital design labs are strengthening our position as a true capability partner. Thirdly, drive operational excellence. Operational execution was a clear strength in 2025.

We expanded margins by more than 100 basis points. and generated operating cash flow with a conversion rate of 110%, delivering over $30 million in cost savings and expect this margin and cash performance momentum to continue into 2026. And finally, deploy capital perspectively. We delivered $413 million in capital to shareholders in the year, and that's the highest in the last decade, successfully integrated Linquist, and delevered the balance sheet within a year. As we prepare for the spin, we remain highly disciplined, ensuring both companies are positioned with appropriate capital structures from day 1.

With that context, let's come to the segment performance starting with sustainable tech on Slide 7. 2025 is a challenging year for sustainable tech, marked by a sharp decline in petrochemicals CapEx and a pause in MediGreen projects as customers shifted their focus towards affordability and energy security.

Now despite this backdrop, [indiscernible] remarkably resilient. Margins held up well in the first half of the year, and our teams responded really quickly pivoting towards the global South LNG ammonia and OpEx-driven markets where demand fundamentals remain strong. That pivot clearly showed up in the results. We delivered strong book-to-bill in [indiscernible] to anchor that outlook Fourth quarter book-to-bill was 1.6x, with a trailing 12-month book-to-bill of 1.2x.

Backlog ended the year at $4.2 billion and that's up 5% year-over-year and up more than 20% excluding Bakken LNG. Our near-term pipeline, excluding LNG, is approximately $5 billion with about 80% from repeat customers showing the relationships that we have developed over time and work under contract covers roughly 63% of our 2026 guidance. putting us above normative levels for this business going into the year.

With that, let's turn to Mission Tech and on to Slide 8. Mission Tech also faced a challenging environment, as you're well aware, in including award delays, we just contingency activity and for us, particularly in Europe and the impact of the government shutdown. Despite those headwinds, MTS performed well. revenue held up year-over-year, margins improved and cash performance was excellent. And this reflects a disciplined execution approach and the quality of the underlying portfolio.

Strategically, we continue to move up market. Activity expanded with the U.S. Space Force and Air Force for [ Tesla ], validating the inquest acquisition. We secured positions on key multiple of work track vehicles and defended several important recompetes, including HHPC and [indiscernible]. While we did lose the Cosmos we compete in 2025, this was at the lower end of margin returns within the portfolio.

Importantly, there are no material recompete revenues expected in '26 suggesting new term incomplete risk. Internationally, as we stand out, particularly Australia, with approximately $800 million in defense award contracts and high single-digit year-over-year revenue growth. While contingency activity declined in certain areas, the border defense and intelligence portfolio performed well, particularly in missile defense, naval air, digital engineering and in R&D. Cross-business synergy bids are becoming increasingly important, and we have several opportunities in the pipeline that reflect a similar integrated cross-business approach.

Looking ahead, the full year 2026 Defense Appropriations Act has been enacted. On MPS, we believe, is well aligned with this funding. We expect award cadence to improve, particularly in the second half of the year, supported by strong bid volume and contract and vehicle leverage. To anchor that outlook, the trailing 12 months to build was 1.0. Backlog and auction ended the year at $19.1 billion and that's up 15% year-over-year with 40% funded excluding PFIs.

[indiscernible] are waiting awards totaled $17 billion with 80% of that number representing new business. We expect to bid more than $25 billion in 2026, and that will be up double digits year-over-year. Finally, work under contract already covers approximately 82% of our '26 guidance with minimal recompete exposure. On to Slide 9. Next, I'll provide an update on our transaction, which remains an important part of our strategy to sharpen focus and drive long-term value creation for shareholders as you're well aware. Preparations continue to progress in line with our plan, and our targeted distribution is anticipated in the second half of 2026.

From a readiness standpoint, we're making steady tangible progress. [ Carve-out ] audits and pro forma financial statements are underway to support the Form 10 process. As committed, we made our initial confidential filing in late December and we currently expect to file an amendment incorporating full year audited '25 financials in March '26. A similar time line is progressing for the private letter remote. So all on track.

We are also continuing to refine the transaction perimeter to ensure operational clarity and strong stand-alone positioning for both companies. And as part of that effort, we have decided to move the Frazer-Nash consultancy business and the U.K. Civil Nuclear project portfolio into sustainable tech. We have provided a supplemental financial information sheet for modeling purposes, and this is accessible via the QR code. And this change has no material impact to our long-term segment growth margins. As discussed previously, CEO and CFO recruitment efforts are underway.

And in the interim, I have appointed Mark Sopp as Interim Spin Senior leveraging his role as spin transitioning lead. And this positions Mark to effectively serve in the capacity while the search for [indiscernible] continues. These efforts, along with early branding initiatives support the future stand-alone companies are progressing in parallel with the broader separation work streams. Importantly, a dedicated spin transaction team continues to drive execution across the organization, really helping to minimize disruption to day-to-day operations momentaneous momentum. And I think you can see that in the delivery of the '25 bottom line results.

The level of internal engagement and coordination continues to build, which gives us confidence and our ability to execute the transaction effectively. We'll continue to keep you updated, of course, as we progress. And with that, I'll turn it over to Shad.

Thanks, Stuart, and thank you to everyone for joining us today. I'm excited to step into the CFO role, an important time for KBR. Mark Sopp built a strong finance organization and a disciplined foundation and I'm grateful for his leadership and the opportunity to build on that work. Looking ahead, my focus is straightforward: deliver on our financial commitments, support the financing and investor milestones associated with the spin and maintain a disciplined financial structure that advances our strategy. With that, let's turn to the fourth quarter results on Slide 11. Revenues were $1.85 billion, down $223 million year-over-year. primarily reflected award timing in MTS and reductions in EUCOM contingency scope.

More importantly, profitability and execution were strong. Adjusted EBITDA increased $12 million and margins were 12.6%, up 190 basis points, driven by disciplined program execution and favorable mix with Com volumes declined from lower margin work. Adjusted EPS was $0.99, up $0.09 year-over-year, reflecting the stronger adjusted EBITDA performance and lower share count following open market repurchases.

Turning to Slide 12 and our full year results. Revenues were approximately $7.8 billion, up modestly year-over-year despite the market volatility. We delivered strong performance in defense and intelligence programs supported by the Linguist acquisition. Continued momentum in Australia aligned with its defense priorities and sustained demand in STS across our engineering, professional services and technology offerings. Adjusted EBITDA increased $100 million. and full year margins were 12.4%, up more than 100 basis points year-over-year.

As Stuart mentioned, this performance reflects prioritizing high-margin growth, disciplined program execution, and continued delivery on cost savings initiatives across the business. Adjusted EPS was $3.93, up $0.60 versus prior year and supported by the increase in adjusted EBITDA and share repurchases. Partially offset by higher interest expense and higher income taxes due to international mix in our underlying rate. That same dynamic is reflected in our 2026 ETR guidance, which I'll cover in a moment. Cash was a key highlight.

Operating cash flow was $557 million, representing 110% conversion to adjusted net income. We exited the year with strong liquidity heading into 2026. Overall, revenues and adjusted EBITDA was in our ranges for the year, and adjusted EPS and operating cash flow exceeded the top end of our guided ranges. Turning to Slide 13. I'll focus on a few financial proof points that support the progress Stuart just outlined in sustainable tech. As discussed earlier, the market environment shifted materially in 2025.

From a financial standpoint, FTS offset those headwinds through mix, geographical expansion and increased exposure to OpEx-oriented and structurally stronger demand areas. That operating discipline is clearly showing up in the quality burn. Adjusted EBITDA has grown 16% since 20.3%, outpacing revenue growth and reflecting improved mix and cost execution. While margins were modestly elevated in 2025, a we are on pace to meet our long-term margin target of 20% plus in 2027.

This performance was delivered alongside strong cash conversion of more than 80% and a trailing 12-month book-to-bill of 1.2 providing good visibility as we enter 2020. Lastly, due to the recurring nature of risk and alignment with our OpEx strategy, we plan to update our adjusted EBITDA calculation beginning in 2026 and to reflect our share of unconsolidated JV operating income. Previously, risk and other unconsolidated JVs were reflected through JV net income. This change improves transparency and aligns EBITDA with how we manage the business. Prior periods will not be recapped as the impact is not material.

Turning to Slide 14. I'll focus on the financial implications of the mission tech progress Stuart just outlined. From a financial perspective, the portfolio continues to move towards higher quality of earnings, driven by mix improvements, disciplined program selection and favorable contract structures aligned to the most durable and well-funded national security priorities. Through 2023, the integration of Linguist, strong international execution and a more selective business development approach has supported mid-single-digit revenue growth while improving margin quality.

Importantly, that improvement has been driven by commercial acumen and contract discipline. Including a greater focus on fixed price and technically differentiated work, not volume. Even with near-term headwinds from award timing and protest activity, the team remained highly selective in bids and recompetes, prioritizing returns and contract terms over scale. That discipline is showing up and sustained margin performance and a robust pipeline. Against that backdrop, the business is preparing to an improving economics, solid visibility and strong alignment to long-term national security demand.

Turning to Slide 15. Capital allocation and balance sheet discipline remains key strengths. In 2025, we returned a record $413 million to shareholders through buybacks and dividends. and we ended the year with net leverage of 2.2x. That reflects both strong cash generation and disciplined deployment. Looking ahead to 2026, our priorities remain unchanged. We're committed to maintaining an attractive and stable dividend through the spin transaction. And to that end, our board approved an annual dividend of $0.66 per share or $0.165 per quarter for 2026.

We also continue to invest selectively where returns are compelling. In January, we invested approximately $115 million to fund our proportionate share of the Swat OpEx acquisition within Brent, a strategic transaction that enhances resilience to CapEx cycles and supports our OpEx expansion. As we execute this investment and absorb typical first quarter cash uses, including incentive payments, leverage may trend up modestly in the first half of the year before coming back down below the targeted 2.5 level as cash builds throughout the year.

Ahead of respective Investor Days, which we plan to conduct before the spin, each segment will assess its capital deployment priorities based on its stand-alone profile. I'll now turn to Slide 16. Our fiscal 2026 guidance. We're providing full year outlook for consolidated company to establish a clear baseman, the stand-alone outlooks to be updated for progress towards the planned spin in the second half of 2026. With that in mind, for fiscal 2026, we are guiding revenues in the range of $7.9 billion to $8.36 billion.

Adjusted EBITDA of $980 million to $1.04 billion, adjusted EPS of $3.87 to 4.22 and adjusted operating cash flow of $560 million to $600 million. At the midpoint, this implies approximately 4% year-over-year growth across all key metrics. We expect transition costs related to the spend to be approximately $140 million to $180 million. inclusive of onetime IT capital costs. To ensure transparency around ongoing performance, we will introduce an adjusted operating cash flow and an adjusted free cash flow metric in 2026 and that add-back spin-related cash outflows, allowing investors to better assess the poor cash generating capabilities of the business.

From a modeling perspective, the guide assumes low double-digit growth in STS at our normative long-term margins of 20% plus, MTS is expected to grow at low single digits, also at a normative margin of 10% plus, which we expect to continue to improve over time. Capital expenditures are expected to be in the range of $40 million to $50 million for the year. Our projected effective tax rate is 26% to 28%, higher than the current year. And as I mentioned earlier, primarily reflecting a greater mix of work in the Global South. Estimated adjusted share count was $127 million, which is exactly where we exited 2024. We expect revenues and adjusted EPS to be weighted approximately 46% for the first half and 54% to the second half of the year.

For modeling purposes, we expect Q1 be largely in line with Q4 '25. And on a recast basis, we anticipate moderate sequential growth in MPS as EUCOM has at its base activity levels and partially offset by seasonal sequential declines in FTS. As a reminder, we will be comping against elevated EUCOM contingency in the first 2 quarters of' '26, which is roughly $60 million to $70 million per quarter. Our guidance includes key assumptions that are worth highlighting given the current political and economic environment. First, we assume the resolution of outstanding protests in the first half of the year with award cadence and Mission Tech improving as the year progresses.

Second, we assume that all material programs we currently support remain in place. Should that change materially, we will force updates as appropriate. Third, we assume modest improvement in interest rates in the second half of the year and stable foreign exchange rates relative to current levels. In closing, our 2026 guidance reflects a disciplined view of the current environment. We entered the year with solid work under contract, strong growth momentum and a highly committed global team. And with that, I'll turn it back to Stuart.

Thanks, Shad. I'm on Slide 17 with some key takeaways. And I'll close with 4 key messages. First, we executed with discipline in a challenging environment. Despite pressure across awards and funding. We delivered results in line with our updated guidance. We expanded margins and generated strong cash and returned that cash at record levels to shareholders. That performance under pressure reflects the strength of our operating model and the quality of the people inside KBR, our teams.

Second, both segment exit 2025 with improving momentum and, of course, visibility. In Sustainable tech, the portfolio is better aligned to structurally stronger demand by the Mission Tech margin discipline, pipeline strength and funding visibility position the business well as a war cadence improves into 2026. Third, the quality and the durability of our earnings continues to improve. Across the portfolio, we are being more selective. We're continually moving up market and leaning into innovation and digital differentiation.

Our focus is really driving better mix, more resilient margins and stronger cash generation over time. And finally, our spin-off prep is advancing as planned. We are making steady progress on separation readiness, capital structure planning and leadership and operational clarity all with the goal of creating two focused well-positioned stand-alone companies and of course, delivering long-term value for our shareholders. With that, I'll turn it over to the operator to open the call for Q&A. Thank you.

[Operator Instructions]. Our first question today comes from Tobey Sommer from Truist.

I was wondering if you could describe to us what the pipeline in STS is for sizable projects with Plaquemines closing out probably next year? Just to give us a sense for how we may be able to fill that hole and even grow?

Thanks, Tobey, not an unexpected question. In terms of the book-to-bill in Q3 and Q4, I think you've seen the performance has been impressive across the spectrum. That includes technology and obviously, the broader capability set in the Middle East, and that's coming through and particularly in the OpEx area, which we feel is strategic growth avenue we want to get after due to its -- due to the long-term contract nature of that giving sort of visibility into earnings over time. We've started this year in Q1 very strongly again in bookings in STS.

So again, I think directionally, that's a very positive thing to see and obviously to disclose today. In terms of the broader pipeline, it's -- we've got a global business, as you're well aware, we see significant opportunity across the globe and across our capability set, and that includes ammonia and technology. It includes the broader technology set. I talked a little bit about Mura in my prepared remarks also. They are now running well. They've come through the 72-hour test products on spec and have actually sold that product already. So we'll see that ramp up through the course, and they've got a number of projects in their pipeline as well, which both as an investor and executor and technology provider, we will take advantage of.

In the broader LNG area, which is one aspect of a business, it's not their business. I would say that we've got obviously work going on in the body. We've got Coastal Bend front-end design also ongoing. And we've got a number of others that we can't tell you about today, unfortunately that we're looking at as we move through this year. I think the other key takeaway here is that many have looked at the equity and earnings line and see that really as just Plaquemine coming through.

We talked a few quarters ago about the importance we felt [ Brisk ] would be delivering in that area over time. They've really sort of outperformed as we headed into the end of this year and have a very strong book-to-bill themselves. And then with the addition of swap, we're obviously more than doubling that EBITDA contribution, which is why we're going to be showing you that more transparently going forward. And that all comes through the equity and earnings line that we'll start to hopefully get people thinking a little bit differently about the quality of earnings and the longevity of that earnings coming through the equity and earnings line. So hopefully, that gives you a rounded view of that.

It does. If I may ask my follow-up on the MTS side, backlog in options growth pretty substantial in the mid-teens and as well as the sizable awaiting award category. Maybe you could give us some color as to the drivers of the 15% growth in backlog as well as the more exciting areas where you've got bids awaiting award.

Yes. Thanks, Toby. Obviously, we've announced a number of wins. We talked a little bit about HHPC and Jabu, which come through with a number of year options in them, which helps in that arena. And more recently and very excitingly, the sort of Space force and Air Force awards in the sort of higher-end digital area. Starting to see some momentum around that. But just the broad portfolio internationally has been terrific as you -- as we talked about again in the prepared remarks. So that's really the story coming into the end of this year.

As we look out into next year, obviously, we've got the work that's under protest. I know had talked about that in his prepared remarks. And that's quite exciting because it takes us to new customers as well in terms of broadening our reach and really the work we're doing in Missile Defense, the work we're doing with spacer, et cetera. And obviously, the award of the Shield IDIQ really positioned us well for workflows under the sort of Golden Dome program also. And we're really seeing tangible wins in that arena as we've press released already. So that sets us up nicely for the future.

But I am also excited about what's happening internationally, and it's a piece of our business that everyone sort of doesn't really talk about enough with Australia growing significantly, continually moving up market with an enormous backlog given its successful wins last year. And really the U.K. as well with increased defense spending happening across, not just in the U.K., but the broader Europe arena really positions us well going into 2016 and actually well beyond, of course, so I think that, again, gives you a sort of overall picture.

We're very excited about the Defense and Intel portfolio in the U.S., the work on the protest is a lot of that in the R&R segment. Of course, and then we obviously have the international portfolio that's performing extremely well and that we reiterate at better margins just because of its commercial nature.

Our next question comes from Mariana Perez Mora from Bank of America.

Good morning, everyone. So my first question is [indiscernible]. And I think we -- and all the investment community will welcome more clarity on the EBITDA and the contribution from the joint venture. But like -- in the meantime, how should we think about Plaquemines for how long it's going to contribute at these levels? How should we think about Lake Charles or at least like energy transfer passing and canceling that project and the impact to that contribution. And if we think 3 years from now, what are the opportunities you guys have to maintain that level of contribution from joint ventures.

That's a good strategic question, probably one best answer more fulsomely at the Investor Day, Mariana. But ultimately, as we said before, the contribution from Plaquemines will run consistently through this year and into early next year. The increased focus on what we're doing around Bris and the addition of SWOT and we're looking at, obviously, more organic and inorganic growth in that arena to build out that portfolio, and we'll talk about that more as we get through the rest of the year. And that bit of the business is performing really, really well.

And so that will be an increasing part of that equity and earnings contribution, which is why we want to be more transparent around it to give investors more confidence on the continued equity and earnings performance. But also it's on top line growth. And top line growth and the associated EBITDA generation coming from that portfolio. And I think the book-to-bill of 1.6, again, really demonstrates the momentum that we're having, particularly in the global South, but ultimately, across the portfolio, and really sort of delivering, I guess, confidence of future earnings. And that's why we are confident on the sort of double-digit growth on the revenue line for SDS going forward. So I think, again, more to come on that at Investor Day, we'll get more into sort of the granular details there. But strategically, that's where we're heading.

And my follow-up on MPS. You talked about Australia. You have been discussing that for a couple of quarters, how strong it is. And now you talk about the U.K. How is the award environment in the U.K. in general going? Like what is your book-to-bill? How meaningful are the opportunities in the near term? And what are the expectations for growth there?

Yes, good question. 25% was a slow award cadence in the U.K. due to the typical defense reviews and in U.S. peak appropriations and really sort of pointing pounds in this case to where the spend is going to be. That process is now behind us, and we can see clear spend priorities going into '26, which is why we're feeling pretty good about where we are and where we're positioned in the U.K. Again, more to come and we'll get more granular in the Investor Day. But I think directionally, you can sense that we've come through what is a flat year in the U.K. and now moving into a growth cycle within our portfolio.

Our next question comes from Ian Zaffino from Oppenheimer.

Thank you very much. question would also be on MCS. Can you maybe give us the kind of the components of the guidance there? I imagine potentially very nicely up above kind of the guidance what should we expect maybe for readiness and sustainment. And any other kind of color you could give us on that

Yes, quite right. Defense and Intel is up, as Shad talked about. Sciences Space is down due to pressure on NASA budgets, as you would expect. So that's contained within the guide. And then we've got and the protests are more aligned to RNS as we look through the course of the year. So assuming that they are successful, we will grow RNS nicely as well as the international portfolio we talked about. And it's also worth saying that. But as I've said in my prepared remarks, we did lose some of our recompetes, which were at the lower end of our margin performance.

But in terms of the guide, although many -- well, not many, -- some of them are under protest, a couple of round of protest. We have not assumed that we will be successful in those protests in the guide. So we've taken a fairly firm view that if we were successful, that would be upside.

Okay. And then you made a comment about doing M&A. How should we think about that? Is this something that's going to wait till end in pre-spin, I don't want to jump the gun on the Investor Day, but how do you think about separating these businesses? Is it going to be 100%. Are you thinking 80% just to get our arms around how you're thinking about capital allocation pre and then also push it?

Yes. No. Thanks. So our statements that we made when we announced the spin still hold, just in terms of the leverage, the net leverage we're expecting to come out of those businesses is circa 2% on STS and circa 3 on MTS, which is well within market norms. We might be a little bit north of south of that, but we're not going to be far away. So those are good numbers to work from today. In terms of we've got some firepower of course, as we go through the year to achieve those leverages. And if we find accretive M&A.

We don't want to stand still and I think we've proven that with the acquisition of SWAT to really advance our strategy and the sort of long recurring cycle of OpEx type contracts, and we'll be looking to expand in areas of strategic importance. But we won't get out over our skis. We won't really [indiscernible] unless there's some significant transformational thing in the middle of a spin, which would be highly unusual. But ultimately, these will be fairly modest but accretive and strategic acquisitions. We don't want to stand still in this period as we've proven through the SWAT acquisition, which is a highly accretive deal for us.

Yes. And maybe just to build on that, Ian, on deployment. -- the year typically begins, as you know, with several funded cash commitments around annual incentive and dividends. And this year, we'll also be incurring some spin-related transition costs as well. And so when you combine those with the strategic investment that Stuart said at the outset with the normal capital expenditures, they effectively consume a lot of the free cash flow in the first part of the year. So as the year progresses, we'll, of course, continue to assess opportunities to deploy NSS cash, obviously, in the most effective banner and close consultation with on board. But our focus really, as we said all along, is making sure we're setting both of these businesses up with really strong balance sheet out of the gate.

Our next question comes from Jerry Revich from Wells Fargo.

This is Kevin Herick on for Jerry. Just had a question on SCS. Would it be possible if you could rank order the growth outlook by end market in 2026?

I think that really is one for Investor Day. We're -- we've got -- we've said this before, several avenues of growth. We're expanding our footprint in Iraq. We announced major Windstar recently. We're expanding our footprint in Saudi Arabia across -- both in different areas of the market. We, of course, have picked up the coastal and LNG feed and the body front-end design and LNG. Technology continues to perform. It's difficult to give you a point estimate in that right now. because of just of timing.

But I would say that the way the portfolio performs, that double-digit growth is the way to think about it at the consolidated level. and we'll be, obviously, as a stand-alone SDS business, we'll be digging into this in more detail when we get to Investor Day.

Got it. Understood. And then on the Mission Solutions piece, on COM cadence, does fourth quarter represent the run rate in activity? Or should we expect a step down in.

Yes, Kevin, it does. And so I'll just remind you though that the first and second quarters of '26 a bit of a tough comp, $60 million to $70 million is what I'll call, elevated levels. has that been through down and is now at its steady run rate coming in '26.

Our next question comes from Adam Bubes from Goldman Sachs.

In MTS, margins for the full year 2025, I think were 10.4%. And it sounds like mix is improving there. So can you just expand on the puts and takes on the margin outlook for MTS embedded in the 2026 guide?

Yes. So happy to take that, Adam. Despite some of the macro headwinds that Stuart pointed out, I think operational performance throughout '25 is really strong. And as you said, resulted in a 10.4% margin which again is in line with our long-term expectations for this business. And really, I think, reflective of the profit first business development mindset within that organization. While we do hope to improve margins over time as we continue to see mix of that business move towards more fixed-price work, but we've not assumed any uplift in '26. And so it's flat sequentially from the 2025 run rates.

Got it. Understood. And then you've talked a little bit about today the increasing mix of recurring OpEx and digital solutions. Is there any way to contextualize what percent of revenues today is OpEx driven? And where you think that can head over time?

So again, I think we obviously not an Investor Day there. Sorry, I keep saying that, but obviously, that's firmly on our minds. But that's part of the reason we are sort of showing more transparency around that OpEx business in Brit. We do have an OpEx-facing business that we own 100% in the international arena, and we'll bring that all together when we meet later in the year for that Investor Day to show you just the opportunity there. We'll describe some of the long-term nature of those contracts. We'll give you an overall margin profile of that particular area and certainly within a range and what the outlook is.

But we're excited about that strategically. We do think that assets across the world, of course, have increased significantly over this last decade. But the level of digital solutioning and thinking through how you can help your customer keep the plant up or make it more efficient and do predictive and analytics that support that is exciting, and we're right in the middle of all that. So I do think it's a SSA, there's going to be more volume of business in this area. And obviously, it's -- the demand is increasing, and we feel we're very well placed over time to take advantage of that.

And I think investors, I think the strategic upside of that is that the contracts are longer term in nature. There's greater visibility of earnings and cash across that book of business. So that's directionally where we're heading, but more to come again in Investor Day.

Our next question comes from the line of Sangita Jain from KeyBanc Capital Market.

Great. Thank you. Good morning, Stuart and Shad. If I can ask two questions on NPS. My first one is, are you still exploring a sale of that segment. Can you speak to the process if you are a best in an option as you look towards the split?

I mean, you know I can't answer that question. So it's I mean we are committed to shareholder value. We've said that many times it's 100% truth. We're going through this spin process to prove that out and demonstrate that. We're open to approaches, we're open to anything that will enhance shareholder value. That's all I can really say at this point.

Understood. And then on the MPS awards in protest, can you provide a bit of detail on how many awards you're projecting? And if any of them are outsized versus the others and also the timing that you're anticipating on those resolutions.

Yes. These are fairly in the public domain. The Mission Iraq award stock $1 billion. And that's with the State Department, then we have a classified program called KTA that's in the similar ZIP code. And then there's some -- we did get one out of protest in our favor, which was the prepositioned stock in Europe, so that's now running through the numbers. And that's the key ones at the moment. And obviously, we are protesting the Kosmos loss and the Del loss as we speak. So -- but again, I would reiterate those are not in our numbers the latter to. So that's kind of where we're at today.

Our final question comes from Andy Kaplowitz from Citigroup.

Good morning, everyone. Stuart, can you talk a little bit more maybe about impacts of AI on KBR. I think you mentioned briefly in prepared remarks. But how do we think about the mix between software and services in MTS? I mean you mentioned digital and sort of the growth there. I think there's quite a few security and regulatory barriers that should protect your business versus AI, but maybe you could elaborate on how you think about AI's impact on KBR's businesses.

Yes. We talked a little bit about this before, I think, in last quarter that I think there's a number of companies that create AI departments, et cetera. And I think they probably spent a lot of money with a lot of gain. We've been very disciplined around how we approach this, and we very much look at use case solutions that actually drive an ROI. We've got a number of activities inside MTS that are funded by government, as you would expect, as we look at that from an R&D perspective, and that hangs off the back of our digital engineering labs that we pressed recently and talked a little bit in the prepared remarks, which are gaining good traction because of that speak to market of R&D projects, et cetera, as you would expect.

More in the STS world, again, looking very strongly use cases around accelerating engineering. Making sure there's checks and balances within that engineering that avoids human errors, speed up progress. But at the same time, looking at how we operate facilities across the world or our customers operate facilities and using particularly digital twins and applying AI and machine learning to really sort of draw data and get trending over time to know what good looks like and make sure that operators can intercede at the appropriate time or the maintenance crews get in to see at the appropriate time.

So it's -- it's a multifaceted approach, but ultimately is driven by use case ROI, and we put quite a bit of front-end effort into that, Andy, rather than just saying AI is good and just running at it. We've been quite disciplined. And that's on the front of office. I think in the back of office, increasing use of bots to drive efficiency and decrease human error keep our SG&A in check or reduce it, in fact, over time. We're rolling out Microsoft dynamics across the STS portfolio, which is really the forefront of a digitalized ERP because our project controls, which gives us all the project data hangs off that, and we can look at things real time and start to make real-time decisions on commercial execution.

And we've also got digital procurement hanging off the back of that and with a similar upside. And so I think that's all digital project execution philosophy underpinned by really a very modern initial digitally enabled ERP is going to stand as a really good stead as we come out of the spin. So I think it's multifaceted, is front of office driven by use case. It was back of office, again, driven by use case, but obviously, with different drivers.

And so you just mentioned it, but like when I looked at the release for STS margin, you had mentioned ERP. And so we always think about sort of the ERP implementation as I guess, a risk factor, but you got over 20% margins again for '26. So how do you think about STS margins are they kind of going to be consistent here over the next few quarters? And do you expect improvement in '26 versus '25.

Yes. quite right on the ERP. It's typically a risk. Our teams have done a fantastic job. We've rolled out dynamics just to be fully transparent. We did a pilot in Singapore. It went well. We rolled it out in Australia, added more functionality went back to Singapore increased their functionality rolled out in India rolled out in the U.K. And now we're looking at how we roll copper out in the U.S., and then we'll move to the Middle East. So I think we've proven that we can roll this out without blowing it out, which is always the risk of hats off our teams and sort of managing the execution and the implementation.

In terms of margins across STS, I think we'll just stick with our statement. I know that it's 20-plus percent across the portfolio. And as you've seen, we have done as we are prudent in how we account for things. And as we close out projects, you will get ups in certain months. But I think over the over the piece of the portfolio performance is 20-plus percent. And I think that's a good measure to stick with.

With that, we have no further questions in the queue. So I'll hand back over to Stuart Bradie for some closing remarks.

Thank you. Thank you very much. So just a few final thoughts. I think as we discussed on the call, 2025 started off as challenging a year as we've seen in many. But I think it really underscores the strength of the KBR portfolio. Our geographical reach being truly global and understanding each of the countries and the different drivers as a real plus a very diversified customer base. And that really drove a lot of a true lack of concentration risk and being agile, both in terms of how we do our business and our business model, that gives both Mission Tech and Sustainable Tech resilience.

And I think that came through in the -- particularly in the bottom line and the cash performance through the course of the year. So despite external noise, we did execute on our strategy and we did so with discipline, and that's really about our people. The quality of our people and the commitment of our people is unbelievable in my hats off to them. And so while we face revenue headwinds, margins did expand, cash was strong and that really, really reinforces the underlying health of the product portfolio.

So as we run into '26, we've got a solid foundation in both businesses, strong work under contract and as we discussed on the cost on pipeline. So I think we're really well positioned in both businesses as we head towards the spin and as we enter 2026. So thank you again for joining today's call. I would welcome Shad and Rachel officially to the team in this forum, and obviously, we'll be talking soon. So thank you very much.

Thank you. That concludes today's call. You may now disconnect your lines. Thank you for joining.

Good morning. Thank you for attending today's KBR's Third Quarter 2025 Earnings Conference Call. My name is Megan, and I'll be your moderator today. [Operator Instructions] I would now like to pass the conference over to Jamie DuBray, VP of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to KBR's Third Quarter Fiscal 2025 Earnings Call. Joining me are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on the Investors section of our website at kbr.com.

This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements as discussed in our most recent Form 10-K available on our website.

These discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our earnings presentation.

I will now turn the call over to Stuart.

Thanks, Jamie, and good morning, everyone. I will pick up on Slide 4. As with all meetings at KBR, we begin today with a brief Zero Harm moment. Last week, we published our 2024 sustainability report, and I would like to highlight several key achievements from this most recent publication.

We are pleased to report an industry-leading health, safety security incident rate and over 93% zero harm days. Additionally, 38% of KBR's fiscal 2024 revenue equivalent to $2.9 billion was allocated towards sustainability initiatives, marking an increase from the $2.5 billion in the previous year. Furthermore, KBR has established and approved science-based near-term targets that align with our net zero objectives. These accomplishments distinguish KBR within our industry. For the third consecutive year, we have been awarded MSCI's top AAA rating, and we recently received a B- rating from ISS, ESG Corporate. This is a recognized prime rating and at the top of our peer group. These highlights represent only a portion of our progress, and I encourage you to review the full sustainability report, which is available on our website via the QR code.

Now on to Slide 5. Let me start today with revenue. Revenue was flat in the quarter year-on-year and up 5% year-to-date from the prior year. While we are really encouraged by a strong book-to-bill of 1.4x for the quarter, this was back-end weighted with little conversion to revenue in Q3. In MTS, as you know, we have significant contracts awarded to us, which are still under protest and conversion remains uncertain with the government shutdown environment.

In STS, we faced several headwinds in the first half of the year. LNG project development was delayed by prior administration decisions, oversupply in petrochemicals led to multiple project cancellations and delays. Middle East unrest caused temporary pauses and new tariffs delayed investment. Additionally, a market shift towards energy affordability resulted in most of our green technology prospects being postponed or canceled. With that in mind, however, the STS business has proven remarkably resilient.

We have replaced the revenue reductions caused by the above headwinds with geographical expansion. We talked about the Middle East and countries like Iraq last quarter, and we've really doubled down in better markets like LNG, ammonia for fertilizer, energy affordability and circularity. STS book-to-bill in Q3 was pleasing. But as I said a moment ago, this was back-end weighted, and Mark will discuss the short-term impact of this in a moment.

The recent bookings, we think, show a shift in momentum, which we expect to continue in Q4, setting us up nicely heading into 2026. Importantly, we focused on what we can control. We delivered excellent bottom line performance in Q3 across all metrics. Adjusted EBITDA margins were up more than 100 basis points year-on-year at 12.4%, delivering an adjusted EBITDA of $240 million, up 10%. This is from a combination of delivery excellence, strong commercial management and prudent cost control. This translated into an adjusted EPS of $1.02, an increase of 21% year-over-year.

Now cash, really important. Cash was the standout in the quarter with conversion over 130% year-to-date, generating operating cash of $198 million in the quarter and $506 million year-to-date. And this takes us into a guided range for the full year, a terrific performance.

Thirdly, our book-to-bill in the quarter in both segments was solid, and we continue to be well positioned in key markets with a robust pipeline of opportunities awaiting award. In addition, we have several new wins in areas of strategic importance, more on this in a moment. In such volatile times, the quality of the work under contract and the pipeline are clear indicators of future earnings potential and thus worth more detail.

Fourth, we'll remind you that circa 40% of KBR's group revenue and over 60%, 6-0 percent, of adjusted EBITDA has 0 exposure to the U.S. government spending budgets and of course, risk related to the shutdown. Within MTS U.S., the majority of our portfolio, as we've discussed many times, is comprised of mission essential operational work, many of which are well-funded multiyear programs. This provides short-term resilience to the government shutdown, and Mark will provide additional details in the outlook.

Fifth, we returned more than $120 million in capital to shareholders this quarter while managing leverage responsibly. Finally, work to progress the spin-off is on track, which I'll discuss in more detail later.

On to Slide 6 and some new contract wins. We were pleased to announce a number of new contract wins during the third quarter, a few of which I will highlight. Let me start with MTS. We were awarded a $2.5 billion ceiling value base period contract, plus another $1 billion in option value to support astronaut health and human performance during space missions. This achievement represents our largest recompete this year. Human performance and space remains a key strategic area for NASA over the medium term as demonstrated by the significantly higher ceiling value awarded to us. Our booking value for this contract, to be clear, was below $1 billion, which is more consistent with the current run rate.

MTS also secured several strategic contracts with the Air Force Research Laboratory, utilizing our expertise in cybersecurity, trusted microelectronics, electronic warfare, digital forensics and sensing. These technological solutions are used to enhance situational awareness and therefore, strengthen decision-making for our military customers, really important stuff.

MTS was also recently awarded a contract for the U.S. Space Force to deploy our groundbreaking collaborative digital engineering ecosystem called Integration Accelerator to enhance Space Force decision-making and accelerate capability deployment. The design implementation for collaborative environment or DICE, together with Integration Accelerator will focus on establishing a state-of-the-art testing and training environment for the U.S. Space Force at its national headquarters.

Moving to STS. We continue to be a strategic partner for [ Basra ] Oil Company and have extended our current contract 2 more years to continue to perform engineering, procurement and construction management services for the Majnoon oil field in Iraq, and that's one of the country's most strategic assets.

STS was also awarded a contract by the Abu Dhabi Transmission Company called [indiscernible] for program management consultancy services to manage the overall execution of the power and water transmission networks across multiple locations in the UAE to enable data center expansion.

STS was also awarded a front-end engineering design contract for Kuwait oil company. That's for their heavy oil program, another strategic energy security project for the nation. Last but not least, STS was awarded the FEED contract for the [indiscernible] onshore LNG project in Indonesia. This is a complex project, which has critical significance to national energy security and demonstrates KBR's long-standing track record in excellence in LNG.

The book-to-bill for the group in the quarter was 1.4x with a trailing 12 months of 1.0x. Backlog and options now stand at more than $23 billion, and this value represents a 13 -- 13% increase since prior year-end and is the highest backlog and option value in KBR's recent history. And I think this clearly provides for the growth capacity contemplated in our long-term view.

On to Slide 7. Next, I'll update you on our pipeline and award trends in both segments. Currently, MTS has $18 billion in bids pending award with over 75% representing new business opportunities. Some contracts such as HHPC have recently been awarded, while new proposals have also been submitted and are awaiting decisions. Although the government contract environment did show some signs of improvement in Q3, the shutdown has brought decisions to a halt, so more delays should be expected.

In addition to the $18 billion, there are now $3 billion in contracts awarded to KBR as the winning bidder that remain under protest, and that's an increase of 50%, 5-0, from the previous quarter. The major addition was a classified program in [indiscernible], which is now included in this category.

Overall, this year, both the amount bid and the amount won have increased compared to the previous year's levels at this time. While short-term conversion has been a challenge, matters under our control to grow backlog, options and pipeline have progressed well, and we remain confident in our strategic positioning moving forward.

MTS itself delivered a 1.4x book-to-bill in the quarter and ended with $19.7 billion in backlog and options, and that's an increase of almost $2 billion versus the prior quarter. STS delivered a 1.2x book-to-bill, excluding LNG, in the quarter and ended with $3.7 billion in backlog. We currently have over $5 billion in our near-term bid pipeline, and that excludes major LNG. This is up from the second quarter when we reported $4.5 billion. This is a 20% increase for our base business.

You will also recall last quarter, we saw an anticipated circa $1.5 billion in awards expected to be approved during the second half of the year. In this quarter, we secured over $800 million in bookings, which I believe demonstrate the value of the STS global business model, our deep customer relationships and our laser focus on delivering value-add solutions to solve our customers' challenges.

With that, I'll pass it over to Mark. Mark?

Thank you, Stuart, and good morning, everyone. I'll pick up on Slide 9 and our Q3 performance highlights. Revenues in the quarter, as you heard from Stuart, were $1.9 billion, flat versus the prior year and up 5% on a year-to-date basis for the reasons Stuart covered earlier.

Adjusted EBITDA was quite healthy at $240 million, up 10%, with margins at 12.4%, an increase of over 100 basis points versus the prior year. This contribution came from both segments with STS particularly strong. Adjusted EPS was $1.02 in the quarter, up 21%, driven by the growth in adjusted EBITDA performance as well as the benefits from buybacks we've made over the last year.

Year-to-date, operating cash flow was $506 million, an increase of 24% from the prior year and a conversion rate of more than 130% against net income. This bumped up quite a bit in Q3. As Stuart mentioned earlier, strong cash performance was attributable to successful DSO reduction measures in both segments.

I'll also add, we received about $80 million in investing cash flows from the turnover of private equity partners in our Brown & Root Industrial Services joint venture. While it's certainly good to add this to our treasury at this time, we do expect to fund new investments in this space with our new partner in the relatively short term. This will further expand our reach into the OpEx side of the STS business, which is perfectly aligned with our strategy of increasing exposure to recurring revenue streams in that area.

Now I'll move on to Slide 10 and our segment performance. Starting with MTS, revenues of $1.4 billion were flat versus the prior year. Breaking that down by business unit, Defense and Intelligence generated growth of 14%, with contribution from the international side and also LinQuest. That business, LinQuest, as you'll recall, has added increased volume in military space and digital modernization with quite of that work being in the classified category.

Readiness and Sustainment was down 22%, primarily due to Department of War strategic shifts, including customer reductions in the [indiscernible] in the European Command Theater and preposition stock programs. We discussed both of those developments last quarter.

After this quarter end, the APS2 preposition program has come out of protest and in our favor, but the notice to proceed is hung up due to the shutdown. This will represent a future booking once that condition reverses. Importantly, revenue for RNS was flat sequentially. So other than any shutdown effects, we think we have cycled out of the areas that the Department of War is deemphasizing and have meaningful growth opportunities in protest and in the pipeline.

Science & Space was down 5%, while we did have the HHPC recompete win, which was terrific, there's really been a lack of new award activity outside of that. And there's an overall funding and decision delays in NASA overall in recent months. It's been a tough year at the agency, but we're certainly hopeful of more visibility and stability in the coming months as they navigate through the '26 budget process in Congress and once the shutdown lifts. Adjusted EBITDA for MTS was $143 million, commensurate with the revenue level with margins at a little over 10%.

Now I'll move on to STS. Revenues of $525 million in Q3 were down about 1% due to back-end weighted awards in the quarter. Positively, though, adjusted EBITDA came in at $123 million, up 13%. Adjusted EBITDA margins were 23.5% roughly, reflecting continued strong contribution from the Plaquemines LNG project coming through in equity and earnings, offset by heavier proprietary equipment mix, which adds to the installed base, but also has lower than normative margins.

We advanced more milestones on the Plaquemines project than originally planned in Q3, and that bumped up our profit recognition this quarter, but we do expect Q4 to look more normative as the rate we had in the first half of this year.

On to Slide 11 for the balance sheet and capital matters. We had really good outcomes in the quarter. Stuart covered those earlier, highlighted by the strong cash flow. We continue to delever now down to a net leverage ratio of 2.2x. While doing that, we have deployed over $300 million for buybacks so far this year, and that certainly was continued in Q3. This amounts to 4.5% of outstanding shares removed over the course of this year. Dividends add another $60 million in capital returned to shareholders as well on a year-to-date basis. And you'll also note that we have returned to normalized CapEx below 0.5% of revenue.

So with that, let me shift to our outlook for the balance of the year on to Slide 12. First, let me start by addressing our near-term outlook in light of the government shutdown. As Stuart mentioned earlier, our diversified international portfolio reduces concentration risk relative to the U.S. government.

For our U.S. government contracting business, as Stuart said earlier, most of our work is deemed essential. And furthermore, we have good stability in our funded backlog. Specifically, U.S. funded backlog was $2 billion at the end of Q3, which is over 5 months of our current revenue run rate. This is slightly up from Q2. With these factors, we have seen no material impacts from the shutdown in October and are confident we can navigate through November with minimal impact to revenue. The main areas impacted by the shutdown to KBR are the further slowdown of new awards as well as the resolution of protests outstanding.

As earlier stated, we now have $3 billion in awards, which we have won but cannot book or start until the protest clears. The shutdown does mean the conversion of these awards to revenue will be even further delayed, which modestly lowers our outlook for MTS in the fourth quarter.

Now moving on to STS. As Stuart mentioned earlier, STS experienced a number of headwinds so far in 2025. These delays have caused conversion challenges, which impacted our revenue growth outlook for the year. With some awards coming in late Q3, we have good visibility to modestly improved revenues in Q3 to Q4, but still short of what we had planned for the year.

So with all of that, we are updating our revenue guidance today for 2025 to a range of $7.75 billion to $7.85 billion for the year with an updated midpoint of $7.8 billion flat. We are reaffirming profit metrics due to the strong year-to-date performance. Adjusted EBITDA remains within the range of $960 million to $980 million. We're also reconfirming the corresponding adjusted EPS guidance of $3.78 to $3.88.

We're also keeping operating cash flow in the same $500 million to $550 million range. Given our year-to-date cash flow was $506 million, we have effectively delivered 96% of the guide at midpoint already. With STS, the international government cash streams have been unchanged and some payments are still being made actually on the U.S. government side. So we're confident we can manage working capital effectively to achieve operating cash flow neutrality through year-end with our underlying assumptions. Speaking of that, our guidance is based on the assumption that the government shutdown is resolved in November. Other key assumptions in our guidance are unchanged, including tax, CapEx and interest expense.

With that, I'll turn it back to Stuart to wrap it up.

Thank you very much, Mark. Before the key takeaways, I will give you an update on the spin-off, which was previously announced on September 24. We are spinning off our Mission Technologies segment, which I will refer to as SpinCo for now until a new name is announced later. New KBR will comprise the Sustainable Technology Solutions business. Our intent is to pursue this as a tax-free spin and upon completion of which KBR and its shareholders will benefit from ownership in 2 pure-play public companies with enhanced strategic focus, operational independence and financial flexibility.

Of course, the transaction will be subject to final approval by KBR's Board of Directors and other customary conditions. The expected benefits of the spin-off include enhanced strategic and management focus, organizational agility and streamlined decision-making, increased end market focus, prioritized commercial resources and sharpened go-to-market approach, greater capital allocation flexibility to support strategic imperatives, including potential future M&A transactions directed at each separate business. And there will be distinct and compelling investment profiles for each.

Now on to Slide 14 and a status update. The spin-off will take place in 3 phases. Number one, advanced preparation; number two, public filing and execution; and number three, post distribution. KBR is targeting completion of the spin-off by mid- to late 2026. And in order to meet this date, we are broadly aiming for the time line shown. Of course, schedules are subject to change, and we'll be communicating with our investment community along the way as things progress.

Today, spin-off preparations are advancing according to plan. Presently, we are conducting audits of historical carved-out financial statements and preparation of the pro forma financials, while also laying the groundwork for the Form 10. Additionally, recruitment processes for the CEO and CFO positions for SpinCo are progressing alongside preliminary work on naming and branding strategies. We have been very deliberate to set up a separate project team in order to minimize disruption to our operations and allow our teams to focus on their core business.

Now on to Slide 15 and some key takeaways from today. First, revenue was flat year-on-year, but in line with expectations given the slower award environment and the step down in MTS [indiscernible] work communicated earlier.

Second, we delivered strong bottom line performance with adjusted EBITDA of $240 million, and that's up 10%. And we also generated an adjusted EBITDA margin of 12.4%, up more than 100 basis points year-over-year, really, really pleasing. Adjusted EPS was up 21% and the standout for the quarter being operating and free cash flow.

Third, book-to-bill in the quarter in both segments was strong, aggregating to 1.4x. And we continue to be well positioned in key markets and have a robust pipeline of opportunities awaiting award. Work under contract or backlog increased, which together with the pipeline are strong indicators of future growth and earnings potential.

Next, we are highlighting our resilience and operational focus due to the fact that over 60% of adjusted EBITDA has 0 exposure to the U.S. government spending budgets, and we have seen no material impacts from the shutdown through today. We continued with our disciplined capital allocation, returning over $360 million to shareholders year-to-date. And finally, our spin-off is progressing nicely.

With that, I'll pass it back to the operator, who will open the call for Q&A.

[Operator Instructions] Our first question will go to the line of Andy Kaplowitz with Citigroup.

Stuart or Mark, can you give more color into how you're thinking initially about STS going into '26? I know you mentioned you have to kind of replace these energy transition type projects and you're doing that. And obviously, you have continued good EBITDA performance. I think you said, Stuart, that you think STS should remain in your growth algorithm. But do you have visibility to still grow that business in that sort of 11% to 15% range in '26? And where does that come from at this point?

Thanks, Andy. Good question and not unexpected given the revenue performance during the course of the year for the matters we discussed in the prepared remarks. The book-to-bill in Q3 and the expected book-to-bill in Q4 with, as Mark said, the modest revenue pickup between Q3 and Q4 gives us pretty good insight, and I think good momentum heading into 2026. We are going through our budget cycle right now. In fact, as we head towards the end of the year, and we've got good line of sight for continued momentum in that business aligned with our stated 2027 CAGRs, which if you work that backwards from '23 to '27, we need double-digit growth in STS, and we're still committing and aligned with that target.

Got it. And then maybe just a similar question in the outlook for MTS. Obviously, you mentioned defense and intel up 14%, which is offsetting some of the other pieces of the business. As I think about sort of going into '26, can you keep up that kind of strength in that business along with international and it helps offset if readiness and sustainment, for instance, or NASA is still weaker? How do you think about the interplay of the different pieces of the business, Stuart?

Yes. Again, very good question. And as you rightly state, it is an interplay. There's pressure on the science and space budgets because of what's around NASA. But of course, there's increased spending, and we've covered off how we sit on programs like Golden Dome, just where we think increased spending in Space Force and sort of the connected battlefield and what we're doing sort of being able to enhance command and control decisions with our software development sort of technology, et cetera. So very well placed in the defense and intel part of the portfolio.

And I would say that RNS, with a number of things that we have secured that are under protest, is well positioned coming off a reasonably low base with the reduction in the UCO work this year is well positioned to grow into next year. And when you combine that with what's happening in international in the U.K., they've come through the defense review and they're going through the process in November, maybe into early December on what you would call appropriations, but just how they're going to spend their money, and we've done the analysis of where we think those priority spends are and our capability set in [indiscernible] and our defense business in the U.K. is very well positioned to really sort of react to that. And as we've said many times, our Australia business continues to outperform, growing double digits.

So when you lay that all out and you put the puts and takes and you think about delays with this continued environment for protests that delay awards and things like that, we're pretty confident that we can actually achieve the sort of growth that we stated in the ranges that we've put out for that business in the past. And it may well be -- we probably at the lower end of that as we go into next year, but those decisions have not been made yet. But certainly, we are progressing towards that sort of outcome, and we're confident we can continue to grow the business coming out of the shutdown.

Our next question will go to the line of Augie Smith with D.A. Davidson.

This is Augie Smith on for Brent Thielman. So just first, you guys touched on it briefly, but could you provide a little bit more in-depth on your thoughts in regards to NASA exposure and proposed budget cuts, specifically in consideration of the impact for MTS the rest of this year and then potentially into 2026?

For the rest of this year, it was very little impact, particularly under the shutdown environment where things just continue as is. We do have one particular contract that's deemed nonessential, but it's not material to our numbers. So I'm not expecting too much change for the rest of this year.

As we head into next year, we've got an unclear picture, I would say, Mark, as we've got the presidential push for a reduction in the science area. We've got congressional budgets holding at the current level and where that all sit and shakes out is difficult to assess. I would say that in the NASA environment, it's the lower margin piece of our work. So from the bottom line perspective, it's probably less material. In terms of looking forward, we've got about less than 25% of our portfolio, maybe even less exposed to the science area.

And I think there's going to be increased investment in the human space performance piece of that as we look at [indiscernible] 3 going back to the moon and [indiscernible] 4, whether that's across what we're doing in human health performance or what we're doing in the broader Johnson and the Space program, et cetera. So there'll be some puts and takes. And I guess, more color, we'll be able to describe more color on that in year-end earnings. But certainly through the course of this year, I don't expect too much disruption. And certainly, I stick by my comments I made in my earlier remarks about the overall portfolio and the puts and takes allowing us to grow overall in line with our stated targets.

Okay. And then if I could just squeeze one more in. Within STS, could you guys touch on how active you guys see opportunities in LNG, if you have any advanced discussions there or just what you're seeing with potential other LNG terminal projects moving forward?

Yes. I'll touch on a few there. I mean LNG is a really sort of topic at the moment, as you can expect. I'll start with [indiscernible]. I mean, our work continues to progress well. As we stated before, we see equity and earnings running all the way through at the sort of current levels through '26 and into early '27. In fact, VG themselves have announced that they've got approval to bring in gas to the second block. So Phase 2, if you like, of Plaquemines. But that's not the -- really it's not a hard stop for us because we've got a lot of completions and commissioning and work to do through the course of this year and early into '27. So that's aligned with our previous statements.

On Lake Charles, I'll take you back to the -- there's been some press statements about certainly the delay in FID decisions into Q1 next year. But some press had said that was related to increased cost. That is not correct. They had said very clearly in the Q2 call, and I can confirm that the [indiscernible] pricing and overall cost, including the impact of tariffs is bang on expectation, and that has not changed. So in terms of ET, and I think you should really listen into their call, which I believe is next week, November 5, and they will give you an update of their thinking and the current progress on the project. So that's where that sits.

We announced that we had been awarded the front-end design for [indiscernible], which is a very, very large project in Indonesia, and that work has kicked off. And we continue to do work supporting Oman LNG. We're doing the PMC work in [indiscernible] LNG in Abu Dhabi. And we've got a number of opportunities that we're looking at in the U.S. in addition to Lake Charles and Plaquemines. So it's a very active global market for KBR and one we're bullish on.

Our next question will go to the line of Michael Dudas with Vertical Research Partners.

First, maybe following on the STS business, maybe, Stuart, away from LNG, when you talk about that $5 billion in pipeline that's visible and some really strong activity maybe for the end of this year into next. What are some of the other areas that are bringing a focus given some of the dynamics and shifts in what client desires are because of green and affordability and how that can play into visibility, maybe especially in some of your key ammonia and also maybe even an update on the [indiscernible] opportunities and ramp-ups?

Yes, quite right. Michael, we were quite specific to exclude LNG from that just because of the scale, just to show you the progress we're making outside of LNG in the business. So I picked up on. Increasing that sort of backlog by the opportunity set by 20%, I think, is indicative as was the book-to-bill in the quarter. And we expect that book-to-bill and that to progress similarly in Q4.

So what are we seeing? We're seeing increased activity, as we said, across the Middle East, and we had a number of wins I touched on, whether it be in Kuwait or Iraq. And we see those national agendas being pushed hard, and we're very well placed to take advantage of those. And I expect more announcements in those arenas to come forward over the course of the next couple of quarters. So I think international expansion and following the money around national agendas is key, and we'll continue to do that. And that's more about energy security as a thematic.

When I look across -- we talked a little bit about LNG, of course, which is very positive. Ammonia continues to be a very active market for us, and we've got a number of sort of near and medium-term pursuits, and we expect that to continue. And as you rightly state, that's more around traditional ammonia as it pertains to fertilizers rather than hydrogen. I think that's also been pushed to the right a bit as the affordability and economics have come into play. But that continues to be a very attractive market for us.

And on [indiscernible], the current situation is we continue to progress similar to next quarter, replacing particularly valves that ultimately have sort of eroded, if you like, under the high-pressure, high-temperature environment but with certain feedstocks that have made the progress in commissioning a bit slower than we had hoped for. I do not expect those plants to be up and running until Q1 at the moment, certainly the one in Wilton.

But outside of that, there's nothing sinister or any sort of big red flags. I think it's first-of-a-kind technology start-up issues. And these are not unexpected. We did hope for a Q4 startup, but if it slips to Q1, so be it. I mean these are long-term plays for us. And if that picks up, then terrific going into next year. And it should present us a super opportunity once the facilities are up and running. There's not a month that goes by without potential investors in plants across the world coming to visit the site and they're just waiting to make sure that we've got an operating manual we can hand over that with a set of equipment specs that actually avoids a typical lease commissioning challenges for the next plant.

So as you would expect. So it's quite an active portfolio. Team is working hard. I think the resilience in the business has been demonstrated by the way that we've managed to pivot to the well-funded pieces of work in the industry and in the markets geographically across the world. So hats off to the team. But yes, quite excited about the future.

Excellent. And maybe just a quick follow-up. When you cite the protest levels, again, I know difficult to predict, but going into like when do you get the sense of the cadence? Is there certain projects further along or have to get started and how that could break to maybe get that conversion to show up in '26 or in a better level?

Yes. I think we certainly -- I think we're all aware that the government shutdown precludes those protests being resolved and the award being worked. Even the protest that has been resolved, we can't get them to give us a start work order because there's -- we're not able to do that under this environment. So there will be pickups, the [indiscernible] in Europe that has come out of protest in our favor will add about $160 million or so to backlog, and we'll book that once we get the work order. And as we look forward, the confidential or classified opportunity into [indiscernible], we expect if the government does come out of shutdown to that to be awarded before or the protest to be resolved before the end of the year.

It's likely that the big piece of work in Iraq will be resolved in Q1. So if that does happen, and there's a question mark over that just on timing and how quickly it gets to the top of the priority list to resolve these matters, it will have a significant upside into next year. But if it delays, obviously, the longer it delays, the less of the impact. But we should be able to give you a very much clearer picture at year-end. But it's a good fact pattern. It's $3 billion under protest that we've won and resolution of that would certainly give strong momentum in the STS segment going into '26 and into '27 for that matter.

Our next question will go to the line of Tobey Sommer with Truist.

Could you tell us if you've -- since announcing the spin, received any interest from outside parties in acquiring either of the businesses?

Tobey, you know I can't answer that question. I'm sorry. I cannot answer that question. The thing that we have announced is going well in terms of under [indiscernible] is progressing as expected and on track. It is typical, I would say, that once you announce such things that you do get inbounds, but we are not at liberty to discuss them in any way, shape or form, I'm sorry.

Okay. Have you given any more thought to the appropriate comparables for valuation purposes versus the stand-alone businesses in terms of existing public companies that trade at multiples that you think are matched more businesses?

Yes. So when I look at MTS, I think the market, we've got -- well, let me put it this way. We have an amazing opportunity to rebrand that business, shake off perceptions of the past. There's still -- when I talk to people even in Wall Street that perhaps don't know us so well, they still think of, I guess, [indiscernible] KBR back in history and don't understand the transformative journey we've been on to position the company in the areas of D&I and science and space and internationally as well as sort of digitalize our platform around readiness and sustainment. So I think there's an amazing opportunity to relaunch the image of the company and tell the story as it is today, not what it was yesterday. So we're quite excited about that.

I mean the margin of the business, I mean, it's progressively grown over time, and we expect that to continue as part of the investment thesis as we go forward. And so I mean, you know the typical peers in the government services realm. I don't have to go over those. But we're certainly a more quality business than people are probably appreciating today. So there's an amazing opportunity, and we're very excited about that opportunity to sort of reinvigorate the market around what will be a new brand and a compelling story of an investment thesis that sits around it.

And we're working hard on the strategy to support that for Investor Day right now. And we just had a session on it this week, in fact, and it was -- yes, you could tell the room was very upbeat. So that was good.

On the sustainable tech side, it's a very similar story. And we've talked about this last time around. There are no real comps that do what we do that are publicly traded. Lummus is rumored to be coming to market via an IPO, but I'm not privy to the timing of that or whether now is a good time or not to do that. So that would be a really good comp if that did happen before we expand MTS.

But as Mark went through last time, as we looked at companies that were -- had energy enablers that had exposure to professional services, the way that we do or technologies the way we do with the same sort of growth and margin profiles as we are projecting to companies like [indiscernible] and Jacobs to some extent, et cetera. So we talked that through, I think, last quarter. Happy to sit down with you in a separate session and talk through that logic. We've obviously got anchors, Goldman, who are supporting us on this transaction who laid out those comps and the trading expectations that are surround those. So that's where we are in that journey. And I think to admire the business for its metrics because there is no direct peer unless Lummus really goes to market before we do, we get there.

I'll just add, Tobey, since the door open a little bit here, Stuart mentioned the branding opportunity and the perception change is possible through this transaction. We view that as applying to both STS and MTS. But also, that's more than that, a lot has changed in the world this year, and we're using this opportunity to make both of our businesses better in the months ahead, leading up to what will be to Investor Days, hopefully in the spring. We're talking about on the MTS side, in particular, we've got rich history in Houston. We'll keep quite a bit of operations there. We serve Johnson there that kind of started all the way back when, but we're going to really increase our Washington presence and our intended impact relative to our customers there. That's a mixture of the Pentagon, of course, and the executive branch.

And so we're really going to increase our resourcing there and our focus, not only in branding, but really articulating the story of how we can help customers be more successful in the changing environment that they're facing. And so a lot of investment is going to go into our impact for business development from an engagement with customer perspective. And so we're building that into the plan. And there are similar improvements that are going to be built into the STS story as well. So we're excited to not only rebrand, if you will, but to tell a different story when it's our time to do so out there in a few months.

Our next question will go to the line of Mariana Perez Mora with Bank of America.

So first, I'd like to dig a little bit deeper on STS. And I was surprised about the margins when you exclude the contribution from the unconsolidated equity in earnings. It was low double digits versus mid-teens range that you usually have. Like how should we think about those margins going forward?

I think it's -- Mariana, good question. It's timing. Mark talked in his prepared remarks that in this particular quarter, we saw a lot of proprietary equipment come through the revenue line. And as we've discussed previously, the way we sell technology is we sell the license fee, the basic engineering and then the proprietary equipment and the combined overall margins are in line with our typical expectations, but the lower margin piece of that is the proprietary equipment, and there was more that came through in the quarter. And we've seen that in the past. We've talked about that to the market in previous quarters where we've seen margins double up or double down as a consequence.

So some quarters, we get very high margins as a consequence of having more of the licensing. But so it's a blended margin over time. So again, nothing sinister there. That is just the timing, but the strength of the portfolio overall delivered, I guess, very attractive margins overall for STS, and we talked about the contribution from Plaquemines, but the contribution from Brown & Root was up markedly as well, and that comes through the equity and lines, which is a sustaining piece of our portfolio. So I think it's -- yes, that's the answer.

So it's still the mid-teens is sustainable near term or like midterm target?

[indiscernible] It's just timing.

And then you mentioned that you expected Plaquemines to continue to contribute until like getting into '27. Is this new $70 million a quarter run rate, the new normal? Or it's more like average year-to-date?

Yes, I also addressed that in my remarks. So we did have a spike in Q3 due to milestone progression, which we're quite proud of and pleased and the customer happy on that front. But if you go back to the first half of this year and you take an average of those 2 quarters, that is the quarterly pace that we expect by and large in 2026 with some spillover into '27. We'll probably have some volatility with that as milestones as they time as often does in this type of business. But for the year, take that pace as a run rate as a good proxy for now.

Right. How should we think about those onetimes or achieving those milestones and recognizing them in the P&L versus the cash flow impact?

They're very well connected to cash. This is [indiscernible] and we will not extract cash out of the joint venture ahead. And so I think as we realize the profit, we will extract the cash and the customer is paying as well in that regard. So cash conversion should be similar for next year, if that's the question.

Great. And then on STS backlog, you guys have been executing on the backlog, and it has come down from like the $4 billion to $5 billion range to like now like in the, I don't know, high 3s. How should we think about the timing on the $5 billion that you mentioned in the prepared remarks that you have in the bid pipeline and how that should impact backlog?

Yes. Near term is over the next 6 to 8 months. It's not like the government procurement pipeline, you can see for quite a ways off, and you can see it coming down the funnel. Obviously, STS is a very different market. And so that's why we talk about near-term backlog. If we looked at long-term backlog, the number would be so big that you wouldn't believe it and rightfully so because some of these projects go away or whatever. So it's far better that we concentrate on what's real. And what's real for us is that sort of $5 billion or so in near-term backlog, which is 6 to 8 months. And as I said before, that excludes things like Lake Charles and those sort of big one-timers that would obviously distort the picture.

Great. And last one, switching gears a little bit to mission technologies and national security. Could you give us -- would you mind giving us some color on how are things going in Australia and the U.K. as you -- because you mentioned like international strength, how is the pipeline of opportunities there? And if they are like moving in line with the speed -- expected speed?

Yes. Very good question. I don't think we spent enough time talking about our international portfolio. It continues to perform in the aggregate in the mid-teens in terms of margin. So it's very attractive. Talk about Australia first, they came through the defense review probably 18 months ago. They are growing nicely. I think we talked last quarter about them going up double digits. Their pipeline remains really strong. They're very well positioned. They're very well thought of as well. Our brand recognition there is really, really good. are very much part of the fabric of the Australian defense market and the Australian infrastructure and STS market for that matter. So we continue to see good potential upside in the Australian market, and that's pretty clear, and we've been very consistent on that. Mark, any more on Australia?

That's the fastest-growing part of the business. It's a little more than 10% sequentially. And -- well, year-over-year, actually, now they see that and sequentially for that matter. So Nick and the team are doing a fabulous job there with the military customer. You asked about the U.K. We talked about changes in government, changes in policy, a little bit slower in that market. Team is doing the best they can with the opportunities they have. And so they're trying to up the bids and -- they have similar sort of conversion issues that we've had in the States, but we're certainly optimistic for the longer term on that being a strong contributor at better margins than the U.S. for sure. So it's a very important market for us to continue to do well.

And I think there's -- as Europe continues or starts to spend more discretionary in the defense sector, we'll start to really think about other opportunities in that broader market beyond U.K. as very carefully and selectively, but certainly, that's the right area for spend for the next several years. And so we have a developing strategy to tap that as best we can.

Yes. And we've got -- just to give you some sort of near-term benchmarks again sequentially, that's up double digits. The U.K., Europe piece is doing extremely well sequentially now that the dust has settled in the way the U.K. defense has come through. So very optimistic about the increasing demand for our services in that environment.

Our last question goes to the line of Sangita Jain with KeyBanc Capital Markets.

With no response, I will close the line. We have no further questions, apologies. Go ahead, Stuart, with your closing remarks.

Yes. Thanks, Megan. So in closing, very excited about the future. We talked quite -- we're quite animated about the excitement around the strategic thesis for both businesses and the opportunity it presents. I think the book-to-bill that we've posted this quarter and the bottom line metrics underpin where our focus is, and that's certainly coming through in the results. Cash being a standout, which is very timely as we discussed. And we do remain very excited about the path for both companies, both New KBR and SpinCo, and we're confident in our ability to continue creating value for our shareholders as we progress towards executing the spin.

So thank you very much for your time today, and I look forward to talking to you one-on-one or whatever after the call. Thank you.

Thank you. That concludes today's earnings conference call. Thank you for your participation, and enjoy the rest of your day.

Hello, everyone, and welcome to KBR's Special Investor Webcast.

My name is Lydia, and I'll be your operator today. [Operator Instructions] I'll now hand you over to your host, Jamie DuBray, Vice President of Investor Relations at KBR to begin. Please go ahead.

Thank you. Good morning, and welcome to KBR's Special Investor Webcast.

Joining me today are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will discuss today's announcement regarding our strategic intent to spin off Mission Technology Solutions in support of unlocking meaningful value creation.

Please note that we will not be answering any questions related to 2025 financial performance at this time.

Today's presentation is available on the Investors section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements as discussed in our most recent Form 10-K and other filings available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors.

I will now turn the call over to Stuart.

Thank you, Jamie. Good morning, and thank you for joining. I will start on Slide 3.

As you may have seen from our press release today, we are announcing our strategic intent to spin off our Mission Technology Solutions segment into a stand-alone publicly traded company. This is the culmination of a multiyear strategic transformation, whereby we have deliberately created 2 strong businesses that have innovation, science, technology and digital engineering as differentiated capabilities. Upon completion of the spin-off, the result will be 2 independent pure-play public companies positioned to unlock meaningful shareholder value creation.

New KBR will comprise what today is our Sustainable Technology Solutions segment, or STS, and SpinCo will comprise what is today our Mission Technology Solutions segment or MTS. Both companies will benefit from dedicated focus and independent financial flexibility. And importantly, this transaction is intended to be tax-free to KBR and its shareholders. And from a timing perspective, it is expected to be completed mid to late 2026.

On to Slide 4. The decision announced today builds on a decade-long portfolio transformation to simplify KBR and convert into a resilient technology and engineering solutions provider aligned to strong secular growth trends. This has really helped to derisk the company and has supported stable, predictable earnings growth and associated strong free cash flow over time.

Let me provide some background as our history is relevant to our future. In 2015, we began transforming our legacy Government Services business. We have since continued to scale our high-end technology services portfolio, both organically and as you're well aware, inorganically across the globe, including the strategic acquisition of LinQuest in 2024. The acquisitions we made over this time are now fully integrated and performing really well.

In 2020, we reshaped STS. Having made the decision to exit lump-sum turnkey a few years prior, we set about exiting commoditized services, including direct construction and really focusing on expanding our IP-protected technology portfolio and leveraging our higher-end engineering and project delivery capability, again, globally across energy security, energy transition and critical infrastructure. You may recall, in early January of this year, we announced a segment realignment, which was the final major step of preparing our business for today's announcement.

The results of our decade-long transformation are clear, as revenue has grown from around circa $5 billion to $8 billion over that period. Margins have almost doubled from a bit over 6% to a little under 12% in the same period. And impressively, adjusted EBITDA has grown by over 180% in the same period with commensurate increases in adjusted EPS and operating cash.

Now I think this clearly demonstrates our consistent focus on continually moving upmarket and, of course, reaping the commercial benefits of doing so. We drove the portfolio mix towards higher growth, higher-margin businesses, divesting non-core assets while acquiring and integrating 13 businesses and realizing meaningful synergies over that period. We also fostered a cultural shift to a high-performing values-led ethos, attracting and retaining industry-leading talent with an unwavering focus on delivering excellence to our customers.

Our people are our most valuable asset and are at the heart of everything we do, and I've said that often. And I wish to take this moment to recognize our incredible people, circa 37,000 strong around the world for their dedication and making this a reality. That said, we are not an organization that stands still and the next logical step in our portfolio transformation to unlock incremental value is to enable these 2 businesses to operate and be owned independently, which will, of course, be achieved via the spin of MTS.

This is a nice segue on to Slide 5. Our team has successfully built 2 leading businesses with the necessary scale and strong financial profile to enable us to take this next exciting step. We expect this will unlock further value creation and growth opportunities for both MTS and our remaining STS business, and we see meaningful strategic benefits. First, the spin is expected to enable enhanced strategic and management focus at each stand-alone entity. New KBR and SpinCo will each build on a strong existing foundation with a focused Board and management team, aligned incentives and increased end market focus.

Second, the spin is expected to enable greater organizational agility by streamlining decision-making and driving increased accountability while also enabling fit-for-purpose operating models.

Third, the spin is expected to better align our capabilities and importantly, our talent to our customer needs and the goal of increased end market focus, prioritized commercial resources and sharpened go-to-market approaches. We anticipate even greater customer intimacy, which is critically important in today's fast-moving environment.

Fourth, each business will have greater flexibility to optimize its capital structure and capital allocation policies to best support their respective growth objectives and investment opportunities, including, of course, potential M&A.

And finally, new KBR and SpinCo will have distinct investment profiles that we believe will be compelling, allowing each company the opportunity to better align their unique value proposition with a natural shareholder base.

To that end, it is anticipated that the spin will enable new KBR with attractive growth and margin performance and low capital intensity to be compared to a more relevant group of peers with similar attributes. And the same will apply, of course, to SpinCo.

On to Slide 6 for a review of the new KBR and SpinCo businesses. We are creating 2 scaled independent pure-play public companies with leading positions in the respective categories, distinct competitive advantages and compelling long-term secular growth trends. Today, KBR is a highly regarded and trusted global brand. A new KBR comprising our STS segment is expected to continue to be a leader in IP-protected process and circular technologies and services, enabling greater energy security, energy transition, circularity and critical infrastructure across the asset life cycle.

In the trailing 12 months ending July 4, 2025, our fiscal second quarter end, the STS segment had reported revenue of $2.2 billion, strong segment adjusted EBITDA margins of around 22%, which excludes corporate and anticipated stand-alone costs and a robust backlog of $3.7 billion. SpinCo, comprising MTS, is expected to continue to be a leading pure-play global Government Solutions provider with an upmarket portfolio aligned to high-demand national security and space priorities with growing budgets. The business is well positioned to continue to capture growth with backlog and options totaling $17.8 billion. In the trailing 12 months ending July 4, 2025, the MTS segment had reported revenue of $5.8 billion and adjusted EBITDA margins of around 10%, again, excluding corporate and anticipated stand-alone costs.

On to Slide 7. Over the next few slides, I will touch on both businesses at a high level, highlighting some key points. There will be a dedicated Investor Day for each of the businesses near to completion of the spin-off, where we will, of course, provide a far deeper dive.

So first, new KBR, a portfolio of trusted, proven IP-protected technologies. It's a global business, a very global business, and it has significant and established presence in key geographies underpinned by a trusted and respected brand. It offers attractive margins, strategic discipline and strong commercial acumen with low capital intensity, very attractive attributes. It is increasingly aligned with our customer OpEx and importantly, CapEx revenue cycles and operates close to customers all around the world with proximity and access serving as meaningful success factors given national agendas vary for energy security and transition.

Over the past several months, we've enhanced our digital delivery and operational platforms, and we look forward to sharing more of this in the future Investor Day. New KBR will continue to offer a good balance of adjusted EBITDA mix and geographical spread, as shown in the pie chart. As a stand-alone business with $2.2 billion of revenue, double-digit historical growth, all organic and attractive margins, it is expected that new KBR will offer a best-in-class financial profile.

Importantly, this business is a low capital intensity given its focus on licensing its process technologies and asset-light solutions. It is not a catalyst manufacturing business. With CapEx accounting for less than 1% of sales, it produces strong free cash flow and high conversion rates. New KBR will emerge as an independent company with a strong track record of successful risk-adjusted international and domestic joint ventures, including Brown & Root Industrial Services, which was formed in 2015 to unlock further profitable growth opportunities.

On to Slide 8. Now we have outlined new KBR's capabilities set across its 2 business platforms, sustainable solutions and sustainable technologies. We are a subject matter experts and offer a unique full life cycle customer value proposition to blue-chip customer base globally. We are proud of the relationships we've built, which includes Aramco, BP, Energy Transfer and Venture Global to name but a few. In short, new KBR is a solutions provider to a diversified energy, chemicals, circularity and critical infrastructure customer base.

On to Slide 9 and an overview of SpinCo. SpinCo today is a very different company to the legacy KBR Government Services business pre 2015. In 2015, Readiness & Sustainment made up close to 100% of the revenue. And this has grown substantially, but now makes up only 25% as we strategically added deep domain expertise across the Defense, Intel and Space domains. The pie charts on the right depict the business and geographical mix. SpinCo is a global business, really important point, with a portfolio of mission-critical, technically-enabled capabilities aligned to national security priorities and at a time when defense budgets are increasing around the world.

This business benefits from a bedrock of long-duration, very sizable contracts that support future earnings and cash generation. With the historical strategic push, both organically and through acquisition into higher-end solutions in areas like digital interoperability, model-based engineering, connected battle space and military space, SpinCo is very well positioned for both growth and margin expansion over time.

On to Slide 10. Here, we are highlighting SpinCo's high-level capabilities and some of our key customers. Our diverse portfolio is balanced across Defense & Intel, Science & Space, and Readiness & Sustainment capabilities, which support our customers' most challenging missions. In the U.S., we are a go-to partner for long-tenured customers, including the DoD, the Navy, Air Force, Army, NASA and the NRO and overseas, the Ministries of Defense in the U.K. and Australia and more.

On to Slide 11. In connection with the decision to spin off MTS, I'm really excited to announce a few executive leadership updates. Post spin, I will remain in my current position at new KBR. Beyond the decade-long transformation of KBR, we have been preparing and working towards today for over a year. We want to ensure the successful execution of this transaction. And to this end, Mark Sopp, our current CFO, will be transitioning into a new role overseeing the spin-off of MTS.

Mark has been an absolutely outstanding CFO, a colleague and a friend and has been absolutely instrumental in transforming KBR. He has my and frankly, all at KBR's thanks. For the spin, he also has the relevant experience having successfully executed a spin in his prior role before coming to KBR. And Mark is ideally suited to lead the spin to completion and to ensure that 2 strong, capable and well-positioned stand-alone public companies emerge.

Additionally, I'm also pleased to announce that Shad Evans will transition into the new KBR CFO role effective January 5, 2026 and post spin will remain the CFO at new KBR. Shad has held a number of senior roles at KBR, including the CFO of STS and Chief Accounting Officer and is a standing member of the executive leadership team in his current role as SVP of Financial Operations. I have worked closely with Shad over the past 5-plus years, and I'm really confident he will help us strengthen our business and execute our priorities. Congratulations to both Mark and Shad. We have also engaged a leading executive search firm to help identify CEO and CFO candidates to lead SpinCo, and we will, of course, share updates at the appropriate time.

And finally, on to Slide 13 and to sum up. The proposed spin-off is intended to be tax-free to KBR and its shareholders. We expect the transaction to be completed by mid- to late 2026, and the transaction is subject to review and final approval of KBR's Board of Directors, the filing and effectiveness of a Form 10 registration statement to be filed with the SEC relating to SpinCo and other customary conditions. We will provide you with updates as we work toward completing the separation, and we will maintain our continued commitment to our customers, our employees, our partners and shareholders as we enter this next super exciting phase of our portfolio transformation. We are very excited about the underlying strength in both businesses, and that is a key point, both businesses and are ready to take the next step and further unlock the potential of our portfolio.

And now we will open the line for questions. Thank you.

[Operator Instructions] Our first question today comes from Tobey Sommer with Truist.

I was wondering if you could give us your perspective of the consolidation of the international business into the 2 STS and MTS and how that's gone over the last several quarters and whether there will be any changes or have you sort of made the right decisions in terms of fit at the time?

Thanks, Tobey. We, of course, were very deliberate in that action to enable 2 more stand-alone entities that we have today to enable what we announced today. The separation and putting the component parts into the relevant elements of STS and MTS has gone extremely well. Both the business models and the synergies that have been realized as a consequence have shown through, and that's now bedded down and working very nicely. So we're very pleased with that decision, and it certainly shows the forethought towards the decision that we're announcing today, and I'm pleased to say that, that is -- has gone really well.

And if I could ask a follow-up, what comparables do you think are best suited in competitors when you look at the new KBR, what sort of firms do you have in mind?

Good question. I would say that there really STS has limited perfect public comps given its unique business model with sort of asset-light, as we said on the call, IP-protected process technologies and circular services that obviously generate leading margins and strong cash flow. And so the comps that I would point you to are businesses that have the same financial attributes. I mean, typically, we are compared with companies like Lummus and Honeywell's UOP business, but that's very much contained within the broader business base, as you know. But our business uniquely combines attractive features of energy security and energy transition enablers, best-in-class engineering design and, of course, complex project delivery.

But I would point out, Tobey, on that question, I want to be clear that the recent transactions with Ecovyst and Johnson Matthey are not comps for STS. They are very much catalyst business, more asset heavy. They are manufacturers, and we've got a very different business mix and profile, as you're aware. We're very much serving diverse end markets aligned to secular growth trends that we've discussed previously with extremely limited CapEx. So very, very different businesses than those types of businesses.

Last one for me. You said you hired a search firm to look for leadership of MTS. When did that process begin?

Recently. Until we go public, it's difficult to really sort of do that with full throttle in earnest. We typically do what others would do and try to do that in a confidential sort of no names basis. So that process has started and now it can amp up now this news is out.

Our next question comes from Mariana Perez Mora with Bank of America.

So my first question is more strategically, right? A couple of years ago, you did an Investor Day that was focused all about this like 1 KBR synergies. And I do understand the synergies, and we have discussed the valuation of like how the sum of the parts was naturally unlocked for the 2 companies separate, but you always said there was like operational synergies that was the beauty of having these 2 business together. What happened to that? And why now is different?

It's very different, Mariana, because, I guess, the piece of the glue that created the synergies we discussed at Investor Day were contained within what was our international government business. which we, of course, decided to, I guess, expand and reduce complexity and move the relevant entities and capabilities into STS and MTS in January of this year. So that was what has changed from that Investor Day to where we are today.

And then when I think about long-term growth and profitability of these 2 business units, how should we think about that in the next like 3 to 5 years or like at least the 3 years that we were talking before, especially for, I'll say, like MTS with this like changed government environment and like some good things like getting not cap extended, but others that is more challenging to get like U.S. Transport Command contract. And then on STS, how we think about that, like both like growth going forward and details about like what is there because this has been more of a 1, 2 line type of business as a stand-alone company, if we will see like different like segments? And last one is, what is the profitability that you expect to see a couple of years from now?

That's a lot of questions in one question, Mariana.

Sorry. I started with growth, and it was like I want to know everything about growth and markets going forward.

We want to know everything. Yes. I mean today, we're not providing any statements around -- beyond we reaffirmed guidance in the press release for this year. We're not discussing future long-term targets on this call. Of course, there will be stand-alone Investor Days for both RemainCo and SpinCo later in this process where we will do a deeper dive. I think it's worth saying without mentioning numbers that we have seen on the MTS side during the course of this quarter, a little bit later than expected, but certainly, you'll have seen a number of announcements of recent awards, which shows in our view that we're well positioned opposite government priorities. And that's not just in the U.S., that's internationally as well and similarly, in the STS business. So we feel that the businesses are building solid backlog to -- for them to continue to perform well, and we'll give updates on numbers and targets as we progress through this process.

Great. And last one from me. I'm making like many, many questions, why did you choose to go for a spin-off versus selling this business to someone else, especially in an industry where M&A and consolidation and this like scale and scope strategy for Government Services has played out so well.

So we've always taken a really sort of proactive view of portfolio transformation, and I hope that came through in the prepared remarks is how we've transformed KBR over time. And we've been continually assessing our portfolio and the decision today builds on really a decade-long transformation. We've really looked at a number of different ways to increase shareholder value and our assessment through that process, which has been ongoing for some time, again, as you're all aware, today's announcement was the result of that analysis. And I'd reiterate that this will be tax-free to KBR shareholders, which I'm sure everyone is pleased to hear, and all the things that we do going forward will ensure that we maintain that tax-free status. So this is not a sudden a decision. This is a decision that's been contemplated over time. There's been a lot of work associated with this.

[Operator Instructions] Our next question comes from Andy Kaplowitz with Citi.

This is Natalia, on behalf of Andy Kaplowitz. I guess the first question I'd like to ask is if you can quantify the expected level of stranded or stand-alone costs post spin? And how should we think about those as largely like near-term transition expenses or ongoing structural overhead?

Natalia, this is Mark. There will be some transaction expenses that we will incur over time, of course, as is standard with this sort of thing, and we'll give -- as time progresses, starting with our Q3 earnings report to the extent we have an outlook for the near term, we'll provide there and '26 will be the bulk of the transaction-related expenses that we'll quantify and enumerate for everybody.

Relative to stranded costs, we're going to work very hard to minimize those, of course. There are some dis-synergies that come with 2 separate companies. There's a pretty well-trodden path in determining those and instantiating those in the 2 different businesses. But we intend to engineer an outcome that delivers a financial profile that is attractive to both companies together with an attractive capital structure that we are committed to deliver here. We're not going to overlever the SpinCo or anything like that. We're going to have a responsible capital structure for both.

And so we expect that both businesses will remain cost competitive through the transaction, reflecting those stranded costs, and we expect to have margin profiles to the earlier question that are consistent with what we now experience. We will, of course, have some cost-cutting opportunities that we'll pursue as we always do. And having done this before, I'm very confident that the cost competitiveness part and the increased focus and the bespoke cost structure designs of both will enable that outcome.

Got it. That's helpful. And just to follow up on that, like what are the key buckets of the stand-alone stranded costs that you anticipate? And like how do you -- how quickly do you expect to offset them through either cost takeout or revenue synergies?

Well, the buckets are you have 2 Board of Directors and 2 C-suites and things like that. You'll probably have some incremental IT infrastructure spend on both and governance costs to some degrees. But that's kind of the pecking order of those categories. And we've already are down the path of -- and I'll talk about this in a moment, but putting together teams that design that and optimize that, that are really bespoke to the 2 businesses as they operate in different markets and have different dynamics in their end markets today that we will be designing to.

Yes. I think it's worth also saying that these businesses have operated for several months as 2 pretty much stand-alone entities, which I think really helps with figuring out the level of stranded costs as we go forward. And I do think the organizational design around the corporate structures around them, there's a forcing function to allow us to make sure that these are fit for purpose, which really I think will -- we will make sure that we're not overburdened on either side as a consequence of the organizational design.

And just further to that point, STS and MTS as 2 separate segments have been operating pretty much autonomously in their own right for a long time. We did a reorganization about a year ago, but even before that, you're talking about ERP systems that are fit for purpose for both of those businesses are well in place today. The overhead support and the G&A support are separated today and are aligned to those business objectives and market conditions. So there's not a lot of dissection that we have to do here to enable the separation out in 9, 12 months.

Got it. That's super helpful. And if I could just squeeze in one more question, right? You previously talked about synergies to keep the business together. But how do you think about the potential dis-synergies? And maybe more specifically, just given the inherent lumpiness of your projects and backlog, how do you intend to manage or smooth out that inherent lumpiness across the portfolio of the 2 sub-entities that are not smaller?

First, I'll say there are not any significant share contracts between the 2 today. So there is not an overt dis-synergy of breaking any one program apart. So with the reorganization that Stuart mentioned earlier, the portfolios of each are distinct and run separately. And so there's not that need of any breakage.

I mean it's -- I mean, we have thousands of contracts across each business, across the globe with, I guess, different sort of market drivers in each sort of geographical area that helps us really sort of grow consistently over time. And I think we have proven that. We're not overexposed to one contract or another. And that served us very well as to how we position the businesses and both have these attributes over the past several years, and that's been done very deliberately to mitigate cycle risk. And so we're not concerned about being overexposed or having concentration risk in terms of one project or one jurisdiction or one customer or one funding stream.

A critical part of the timing of this decision is achieving scale and diversification within each business. And so we've been very measured and patient to deliver while the answer and the setting about it today because of the deliberate globalization of both businesses, the diversification within multiple market streams. You've got OpEx, CapEx mix on the STS side. You've got domestic, international and multiple lines within MTS. And so both have scale, both have diversification to the question relative to any concentration risk.

And we have a follow-up question from Tobey Sommer with Truist.

Conceptually, when it comes to leverage, how do you think about the distribution and differences of new KBR in terms of its ability to appropriately sustain certain kinds of leverage as well as SpinCo. We have public company comp group that's a little bit more visible for SpinCo, so we can look at averages there. But STS, as you mentioned in the comparable discussion, not quite as clear.

Tobey, Mark here. What I would say is, we've got quite some time to until the separation or the spin-off itself. And so what we do between now and then relative to capital deployment can change what I'm about to say by some measure, but I don't think a lot. But by its nature, the MTS business can withstand a little bit more leverage than the STS business due to the duration of long-term government contracts that you're well aware of. And so think about leverage that the 3 handle is sort of the zone we would look target relative to that business, and that's consistent with peers you would see.

And on the STS side, think about a 2 handle number ballpark, which is a business that has great diversity and global reach and things we mentioned earlier, but it does have some shorter visibility compared to MTS. And with that, a capital structure that is a little bit more conservative. So that's how we would initially allocate the capital structures today. Again, that can move a little bit between now and spin date. And we consider both of those attractive capital structures in a separate company instance.

We have no further questions. So I'll pass you back over to Stuart Bradie for any closing remarks.

Thank you. Thank you again. I know this was done at short notice. So thank you for making time, and thank you for your interest in KBR. We do look forward to successfully executing on our proposed spin and speaking with you next month when we announce our fiscal third quarter results. And of course, we'll update you along the way as this process evolves. And before I finish, I'd quite like to hand over to Mark just to say a few words really relating to his new role.

Mark?

Well, great, Stuart. Thanks for the opportunity. Thanks, everyone, for joining us this morning on short notice.

First, I'll say it's been an enormous honor and privilege to be the CFO of this company for the past 8.5 years. This is a really great place to work, and it's been a lot of fun and it's been a lot of hard work. And I will say that KBR is very different today than it was 8.5 years ago, and it's been a great honor to be part of the change that has taken place here in such a positive way.

I'll also say that it's really exciting for me to have Shad Evans as my successor here. I've worked with Shad a long time even before KBR, and I'm enormously confident that he is going to be a brilliant CFO for new KBR going forward and the existing KBR until the spin-off date. And so I think you're going to find that he is very sharp and he has all the intangibles to make the great CFO, and that's going to be fun to see from -- for everybody really.

And so with that confidence, I will say that for the spin-off itself, I've had the experience of doing this before. Our General Counsel, Sonia Galindo, sitting right here with me, has done this before, and so we have some experience on the team. And what we know is that a separate team that is -- that has been constructed already will be focused on the transaction itself, a very professional team that will have and does have already work streams for all the elements that you would expect to make this transaction successful from legal to tax to accounting, everything like that, as well as taking care of our people in this process.

What's really important to us, besides delivering a successful transaction, is to make sure our business leaders stay focused on running the business at hand. That is priority one. We have customers to serve. We have missions to serve with all of our customer sets, and we're going to be very focused on continuing our success there. Meanwhile, the transaction has a timetable that is normative. And what I really look forward to the most is when we have Investor Days for both SpinCo, MTS and for new KBR STS, we're going to present to you 2 very compelling investment thesis that are going to be different. They're going to be focused on the end markets they serve, and I think you're going to be really excited about it.

No. Thank you. Perfect, Mark. So with that, I think that concludes today. Thank you again for listening, and I'm sure we'll talk again in the near future. Thank you.

This concludes our call today. Thank you very much for joining. You may now disconnect your lines.

Good morning. Thank you for attending today's KBR's Second Quarter 2025 Earnings Conference Call. My name is Megan, and I'll be your moderator for today. [Operator Instructions]

I would now like to turn the call over to Jamie DuBray, VP of IR with KBR. Please go ahead.

Thank you. Good morning, and welcome to KBR's Second Quarter Fiscal 2025 Earnings Call. Joining me are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions.

Today's earnings presentation is available on the Investors section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and potential impact on performance as outlined on Slide 2.

These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our earnings presentation.

Beginning this quarter, for the current period and all prior periods, we are reporting results on a continuing operations basis with the impact of the wind down of HomeSafe Alliance JV reported as discontinued operations. Unless otherwise noted, the information presented herein reflects continuing operations only.

Refer to Note 17 in our Form 10-Q for full details on discontinued operations. To facilitate investor modeling and analysis, we have provided an updated data sheet, which recast historical results on a continuing operations basis. This schedule is available on our Investor Relations website and available via the QR code shown in the appendix.

With that, I will now turn the call over to Stuart.

Thanks, Jamie, and good morning, everyone. I will pick up on Slide 4. Today, as with all meetings at KBR, I'm starting off with a Zero Harm moment. The Safety Excellence awards are given each year to contractors or subcontractors with excellent safety records at an asset owner site. The award helps companies land from each other by sharing safety ideas, and best practices. Each year, the industry business roundtable selects the top safety performers from nominated contractors and subcontractors. This year, our Brown & Root joint venture won the Top award for Large Contractors.

Our Brown & Root JV continues to perform really well and is actually growing more than 30% post-COVID. We don't often talk about the value-add we bring to our unconsolidated JVs. But I think this is a great example of slowdown, world-class programs delivering top quintile performance. Really good stuff.

Now on to Slide 5 and some key messages. Now before we begin, I want to address the recent and unexpected termination of our HomeSafe Alliance joint venture contract by U.S. TRANSCOM.

Importantly, the company and our people put in a tremendous effort into this transformational program. We are, of course, disappointed with this outcome. And while we wish our perspective had been more fully considered, we acknowledge there were operational challenges. We are committed to learning from this experience. This allows us to refocus our energy on our core business of MTS, and our strategic vision is unchanged, and KBR remains strong in our markets.

With that, now on to our Q2 performance. First, we delivered solid performance on the top line with revenues of $2 billion and strong bottom line performance with adjusted EBITDA of $242 million. We generated an adjusted EBITDA margin of 12.4%, up 70 basis points year-over-year.

In volatile times, a strong focus on both bottom line and cash performance is extremely important. This includes cost management and delivering the excellence to improve margin performance overall. This focus really delivered for us in Q2 and of course, year-to-date.

Second, we continue to successfully execute our growth strategy through customer simplicity and focus on key geographic markets. One of which is the Middle East. In addition, with the details of the Reconciliation Act of 2025 are now available, today, we will share how we are poised for growth in key defense areas.

Third, we continue to demonstrate consistent, disciplined capital allocation with continued share repurchases and active management of leverage.

Next, we are adjusting our previously provided 2025 guidance to remove HomeSafe and to address the impacts we've seen from DoD defunding of programs and delayed protest resolutions. The good news is there is no change to our profit and cash flow outlook, and we are confident some of the business will be restored or replaced in the out years as the new administration settles and incremental funding under the recently passed Reconciliation Act starts to flow.

As HomeSafe also had considerable revenue embodied in our long-term targets, it's appropriate to remove those from expectations. Mark will be going into more detail on all of this later.

Finally, we remain committed to creating shareholder value. Moving into this year, we reduced our organizational complexity by collapsing what was the international government portfolio, moving the appropriate business elements into what is now mission tech and sustainable tech to deliver greater alignment, synergy and efficiency.

We are prioritizing pursuits in MTS to be commercially rigorous and aligned with the spending priorities in the new defense budget and expand geographical reach in STS as markets adjust to the new normal. This is intentional to enable strategic optionality for us to execute on opportunities to maximize shareholder value. Today, both MTS and STS are delivering strong bottom line numbers. Our pipeline and bids awaiting award are at record levels, and we are optimistic that conversions are forthcoming. We are committed to making both businesses stronger on a combined or a stand-alone basis.

On to Slide 6. I will highlight a few of our recent wins. Starting with MTS. We were awarded a subcontract with strategic resources to expand our psychological health services to aid Army training. We announced the win of the Djibouti based operations contract worth $476 million, which is one of our major recompetes this year.

And the continued momentum with the Air Force Research Lab customer are winning multiple strategic contracts under the innovative cyber infrastructure threat assessment environment, which is called I-N-C-I-T-E, INCITE.

Finally, we were awarded the LOGCAP V contract extension through to 2030 for both EUCOM and NORTHCOM.

Moving on to the STS segment. We recently won a large award for a well-scaled ammonia and urea complex. The client remains confidential. However, this one is significant as it demonstrates the commercial value of our integrated services and proprietary technologies, and we are looking to apply this on several other ammonia projects in our pipeline.

Similarly, we won a FEED contract for the car electrical power production called KEPPT in Iraq based on the KBR proprietary ammonia technology also. We were selected for BP for both detailed engineering and procurement services for the largest oil and gas terminal in Azerbaijan and for the Shah Deniz gas project also in Azerbaijan. We are the partner of choice because we have the local capabilities that are truly differentiated.

Finally, you may have seen that Mitsubishi Chemicals and ENEOS announced the opening of their plastics recycling plant in Japan this past month, which uses the exclusively licensed Hydro-PRT technology from KBR. At the group level, we ended the quarter with a 1.0 PTM book-to-bill and $21.6 billion in backlog and auctions.

Slide 7. This quarter, I wanted to provide a little bit more color on our pipeline, and the award cadence we are seeing in both segments. In MTS, we currently have $19 billion in bids awaiting award, of which 72% represent new business. This includes significant contributions from National Security, Space, National Intelligence, Test and Evaluation and other U.S. government priorities.

As mentioned last quarter, we still have $2 billion in contracts that have been awarded to us as the winning bidder, which remain under protest. The extended delays have contributed to revenue shortfalls this year, and Mark will touch on this later.

Encouragingly, we have seen recent success in our new business acquisition efforts. The win rates for the first half of 2025 are up compared to the first half of 2024, demonstrating that prior investments in BD are yielding positive results. In addition, we expect to increase our bids to missiles by 30% in 2025. And this underpins our confidence in continued growth within MTS when government operations stabilize.

This being said, the government contracting environment is changing quickly, particularly in the U.S. More funds have been directed towards National Security with improved speed of delivery of advanced capability to the war fighter and cost effectiveness being driven hard by the new administration.

I'll cover tapping this opportunity shortly. In STS, the first half of 2025 presented a dynamic landscape with evolving market conditions, shifts in global trade, regulatory environments, and changes in energy priorities, including a greater focus on affordability and the balance between sustainability and energy access. And these have influenced project time and market approaches.

Despite these factors, the business has adapted to new opportunities, realigning priorities to meet the shifting demands of the industry. STS continued operations across multiple energy vectors, delivering projects in established and emerging markets.

Results from Q2 reflected ongoing activity in core markets such as LNG, ammonia and infrastructure. No significant competitive tenders were lost, but several large awards were deferred due to earlier challenges and are now anticipated in Q3.

Heading into the second half of 2025 and into next year, the STS pipeline remains robust and diversified with over $4.5 billion in opportunities for Q3 and Q4. We saw approximately $1 billion in potential awards shift from the first half to the second half of the year, bringing the total expected in the second half to more than $1.5 billion.

In conclusion, demand remains strong, but decisions have been delayed. Thus, we remain confident in both our growth strategies and our execution.

On to Slide 8. we have a four-pillar growth strategy centered on expanding in key markets through delivery and innovation, achieving leading margins and then deploying capital back to our shareholders. As you know, the Middle East has been a core geography for us to capture breakout growth as evidenced by the 20% growth in the region on a trailing 12 months basis. And today, I want to take a deeper dive into this region.

As we discussed earlier, the Middle East has been busy despite regional launches. While that our priority shifts in Saudi to gas development, including ammonia and infrastructure, with oil and petrochemical development a lesser priority. So starting through priorities across energy security, energy transition and infrastructure, we are seeing an offset in other countries, including Iraq, Kuwait and the UAE. These countries are also making investments to further their strategic policies for economic diversification, leading to increased industrial technology and infrastructure spending and our key focus geographies for us.

KBR represents a well-known and dependable supplier in these markets with reference projects and customers throughout this area. In Iraq, we have a significant presence in country across several projects, including working with the Ministry of Planning directly to support the strategic direction of the country.

Now Iraq aims to ramp up oil production and is investing in gas capture projects, petrochemical expansions and clean hydrogen economy initiatives. Similarly, in Kuwait, we have a strong presence, and we also see a robust pipeline of opportunities.

The company's Vision 2035 includes generating 15% of its electricity from renewables by 2030 and developing up to 25 gigawatts of green hydrogen and ammonia capacity by 2050. In addition, Kuwait plans to increase oil output and is expanding gas production, refining capacity and renewable energy initiatives. And in the UAE, KBR has been a trusted partner to ADNOC for years, and manages over $100 billion in CapEx on key programs within ADNOC's portfolio.

Additionally, KBR has recently been awarded the TAQA Nexus project to enable expansion of electricity and water distribution to plant data center investments. The UAE is investing over $400 billion by 2035 in energy diversification decarbonization, LNG expansion, digital infrastructure, making it a global leader in energy and digital infrastructure investments.

Our strategy focuses on building customer intimacy, really understanding client sustainability goals and offering tailored associates. We maximize in-country value by boosting local employment enhancing training, and of course, developing local talent.

Our differentiators include deep local engagement, strong partnerships, rapid solution deployment and advanced digital capabilities. This is another example of how KBR's multiple pathways to growth provide an agile, resilient business model.

On to Slide 9. Details of mixed use defense budget requests are now available, and the Reconciliation Act has been approved through the House and Senate, as I'm sure you're well aware. So we have line of sight to the first of a $1 trillion defense budget, which is lined up for 2026. This includes an incremental $150 billion in spending for national security priorities on top of the President's budget request of about $850 billion for baseline defense spending. And it's a great time to discuss what this means to KBR.

The new administration prioritizes efficiency and mission outcomes of which KBR is directly aligned through our technology integrated solutions and operational focus, which have differentiated in the market.

Now starting with the RDT&E Wedge of the defense budget, which is well aligned to our defense and its old business units. U.S. Space Force budget, including reconciliation is programmed for an incremental circa $11 billion. Now that's 35% more than full year '25 levels.

KBR is well positioned to capitalize on this budget increase following our acquisition of LinQuest & Centauri and our positions on several existing contracts including USSF specific IDIQs with limited competition. Golden Dome, funding of $25 billion was included in the reconciliation bill. As this program matures programmatically, KBR is very well positioned through existing USSF, Army, Air Force and intelligence community contracts.

KBR has a long history of engineering support to the Missile Defense Agency on platforms, including Patriot, THAAD, Army IBCS and various sensors, including over-the-horizon radar, and low-tier air and missile defense sensors.

Given the urgency of the Golden Dome timeline, we expect much of this funding to flow to existing contracts and vehicles, which we are well placed such as the IAC MAC and SIBUR Phase IIIs. $40 billion of investment in future weapon systems creates significant opportunity that KBR is already actively positioning to capture.

We have a strong pedigree of engineering expertise and technical support to several programs that are in higher demand in the new budget, including PATRIOT Missile Defense, LTAMDS centers, THAAD, and IBCS.

KBR's intelligence community portfolio is well positioned for growth also with both national and military intel budgets up significantly.

Moving on to the O&M wedge. There is good opportunity here as well, addressable by our readiness and sustainment business unit. Geopolitical tensions heightened the need for additional O&M spending. And R&S, as you know, has a good position globally relative to O&M increases going forward as well as unmatched capability and contingency operations for rapid and expeditionary support.

The reconciliation bill provides $16 billion more in O&M for Army, Navy and the U.S. Air Force sustainment. All customers and areas where KBR currently have strategic portion and market share. Munitions storage and transport are also key funding priorities for this administration, and we will be pursuing opportunities here through our leading digital solutions for asset management, optimization and readiness.

I also want to touch briefly on the outlook for the 2026 NASA budget, which is well aligned to our science and space business unit. Of course, the budget today is not yet final, and any impact to KBR will be in 2026. While the presidential budget requests saw significant NASA budget cut, both the reconciliation bill and congressional appropriators into fund NASA closer to the full year 2025 enacted levels.

KBR's work is operational and core to NASA's primary mission. We fly the ISS, we perform space launches, spacecraft development and operations, and we build the next generation of space suits, and we prepare NASA and private astronauts for their missions, and we fully expect these activities to be supported in the 2026 budget.

Specifically, there is $10 billion in the budget reconciliation for NASA aimed at strengthening NASA's national security missions, while House and Senate committees are working to preserve funding for key science programs. This should provide support for our work on the Artemis program and our ongoing work supporting the ISS out of the Johnson Space Center.

KBR has provided six decades of support to the moon and other space missions. While details are not clear on which science programs will be funded, it's good to see more support and our exposure here is not significant to the bottom line.

Last but not least, we see future growth opportunities with commercial space and also with the necessary future expansion of the space launch infrastructure. Although not related to the U.S. government budget, it is also important to note that international portfolio within the D&I business unit is also well positioned. Both the U.K. and Australian governments just came out of post-election strategic planning, and are now moving to execute sovereign priority investments that KBR is well positioned to capitalize on, including space, maritime, missile defense and Intel domains.

We support the AUKUS program, which remains a key component for Indo-Pacific deterrence and continues to get strong bipartisan support. We have also just completed a small acquisition taking us strategically into the classified market in the U.K. called Infrastar.

On to Slide 10. We have intentionally positioned the company effectively to capitalize on these priority funding areas of advanced defense technologies, military space superiority, digital engineering, intelligence and mission cybersecurity. In line with this strategic focus, I would like to outline the key objectives for MTS to capture these opportunities and bringing advanced capabilities to the war fighter and in turn, further drive top line growth and drive margin expansion.

We will strategically realign resources and investment to capture new priority areas, particularly those incrementally funded by the Reconciliation Act. We are accelerating model-based systems engineering and AI solutions to a broader set of government customers. So for example, KBR developed a digital test environment where we are accelerating the development and testing activities for the Air Force's collaborative combat aircraft program across six O&M contractors using cutting-edge model-based system engineering platforms. And this digital capability will reduce the development time from decades to just a few years, driving greater speed and lower cost of capability to the war fighter.

There are many, many broader applications for this type of digital capability, and it can be applied to most weapon systems. In another example, we're using our digital lab in Huntsville, Alabama to assess digital maturity for army command control challenges across integrated missile defense, ground vehicles, aviation platforms and centers. This work includes moving away from traditional manual methods and creating innovative digital environments that provide faster data driven insights to the customer for improved design, effectiveness and speed.

We're also strengthening government relations to communicate our agile capabilities to shape new opportunities tap existing contract vehicles and leverage KBR's broader commercial acumen. We are also expanding our presence in high-margin international markets and continue to add scale through a unique combination of technical consulting and program delivery.

And a good example of this is leveraging Frazer-Nash consulting engagement across the whole nuclear ecosystem.

And fifth, we are driving operational excellence to enable increased investment in growth, and this will include further enhancing shared services and digital and implement for our support functions. We welcome the administration center of urgency to accelerate digital and commercial solutions to improve national security effectiveness, which aligns to our own business profile and our strategy.

With this, I will now hand over to Mark.

Great. Thank you, Stuart. I'll start on Slide #12. So as Stuart just laid out, the first half of 2025 has seen its fair share of challenges. However, I'm pleased to report our results and outlook speak to our resiliency and multiple paths to deliver bottom line profits and cash flow.

Revenues in the quarter were $2 billion, up 6% versus the prior year, driven by growth across both segments. Stuart touched on the reasons for this being lighter than expected, which extends to our outlook.

Adjusted EBITDA was $242 million, up 12% with margins at 12.4%, an increase of 70 basis points versus the prior year. Margins were stable in MTS and improved in STS with strong performance in all areas.

Adjusted EPS was $0.91 in the quarter, up 10%, reflecting a mix of normative interest and taxes with net unfavorable non-op expenses despite the lowered share count from buybacks. Year-to-date operating cash flow was $308 million. That's up 20% versus the prior year by the conversion rate against net income of 123%.

Now on to Slide 13 and our segment performance. I'll start with MTS. Revenues of $1.4 billion were up 7% versus the prior year with adjusted EBITDA of $141 million, up 6%. Margins were 10% flat and in line with our targets. By business unit, Defense and Intelligence generated strong growth of 21% due to the LinQuest acquisition made in Q3 of last year and growth in international, particularly Australia, which was up 10%.

Readiness and sustainment contracted due to a slowdown in certain activity within the European theater, and a pause in some logistics work tied to the Army's transformation initiative. And science and space remain consistent with growth opportunities currently limited due to uncertain NASA funding policy so far under the new administration.

Over to STS revenues of $540 million were up 2% year-over-year, reflecting some softness in new awards and conversion so far this year, driven by the factors Stuart mentioned earlier.

The good news is that similar to MTS, STS has built a solid pipeline that we believe is well positioned for conversion once uncertainty settles down.

Adjusted EBITDA was $129 million, up 17% with margin of 23.9% in STS, an improvement of more than 300 basis points. The margin strength continues to be driven by unconsolidated joint ventures, particularly LNG performance as we continue to unlock value through strong project execution and excellent production metrics for the clients.

We expect to continue progressing on key LNG milestone and retiring risk over the course of this year, next year and into 2027. Based on our current milestone schedule, we anticipate fairly stable equity and earnings contributions from unconsolidated joint ventures in STS across the first and second half of this year, and similar levels in 2026 as well.

So again, pretty flat expected performance from first half this year to second half this year and doing that again in 2026. That's the current expectation.

Now that we have covered continuing operations, let me quickly address the wind down of HomeSafe. Details of this discontinued operation are provided in our 10-Q, but here are some of the main figures. Year-to-date after-tax loss on discontinued operations, which was attributable to KBR was $36 million year-to-date. Of this amount, losses from operating the underlying program were about $24 million with the remaining $12 million comprised of impairment of assets and provisions.

The year-to-date cash impact was about $30 million outgoing, of course. And going forward, we expect some fairly minor trailing expenses with estimated cash outflow for the second half of about $20 million, including net liabilities carried over.

Now I move on to Slide 14, balance sheet and capital matters. During the quarter, we did continue to execute our balanced capital deployment strategy. We ended the quarter with a net leverage of 2.4x, down from 2.6x in the prior quarter. That's the deleveraging we talked about at the beginning of the year.

During Q2, we returned $70 million of capital to shareholders, comprising $22 million in dividends and $48 million in share repurchases, bringing total capital return to shareholders to $245 million year-to-date, delivering a 3% reduction in share count so far this year.

Our capital allocation priorities remain unchanged, focusing on returning capital to shareholders while maintaining responsible leverage.

So with that, let me shift my comments to the balance of the year outlook. So over to Slide 15. We are updating our revenue guidance for fiscal 2025 from $8.7 billion to $9.1 billion as a range to the new range of $7.9 billion to $8.1 billion with a midpoint of $8 billion. We have provided a walk from our previous revenue guide midpoint to our revised guide midpoint on the right side of this chart, and here, I'll cover the components.

First, our original guidance was based on assumptions that HomeSafe would provide estimated revenues in the range of $300 million to $500 million for 2025. And as such, we've removed $400 million at the midpoint from our guidance.

Second, our original guidance and also assume a continuation of the current European command work supporting the Ukraine conflict, which had a run rate of $200 million to $400 million per year. Additionally, we are seeing impacts from the Army transformation initiative I mentioned earlier as they sort out various logistics priorities around the world. Together, we are reducing revenue guidance by $250 million for the year for these two items.

And lastly, we are removing $250 million of revenue for delays in protest resolution. Of our various awards last year, $2 billion in contracts awarded to us remain in an extended protest process. Our plan for this year included significant revenue contribution from these in the second half of this year. And as they are still in protest with no affirmative data resolution, we are removing them from our guide.

Typically, new wins would offer some offset to these types of unexpected reductions. However, despite the buildup of bids awaiting decision, we're at the point in the year where conversion of awards to revenue, including likely further protest delays may be difficult to achieve.

Our guide assumes the opportunity shift to 2026. Importantly, and has been indicated on prior calls, we did not factor in profit contribution from HomeSafe in our original guidance this year. Also, the margins on our EUCOM, Ukraine support and the logistics programs frozen are very low. At the same time, the profit contribution from other areas in KBR are either on or above track, providing an equivalent offset.

Accordingly, the reduction in our revenue outlook does not impact our adjusted EBITDA outlook. Below the line items were a little high in Q2, as I said earlier, but they are normative on a year-to-date basis. As with our adjusted EBITDA outlook, there is no change to our adjusted EPS outlook for the year.

With the first half behind us, we are narrowing the range on both adjusted EBITDA and EPS metrics with the midpoint remaining unchanged. Operating cash flows were healthy for the first half with no change to the bottom line expectations. Our cash flow guide of $500 million to $550 million for this year is unchanged.

With the removal of HomeSafe, we're also updating our CapEx guidance to take out about $20 million, bringing our expected CapEx for the year to be between $30 million and $40 million for continuing operations. All of the key assumptions in our guidance are unchanged, including tax, depreciation and interest expense.

Now I'll shift to our long-term targets for 2027 on Slide 16. These targets include a meaningful contribution from HomeSafe, so it's appropriate to address those impacts today.

Starting with revenue. We previously gave a consolidated target at $11.5 billion plus and a segment growth, compounded annual growth rate of 11% to 15% for both segments.

The MTS segment growth CAGR is being restored to the pre HomeSafe range of 5% to 8% and the STS segment growth CAGR remains intact at 11% to 15%. We're setting the 2027 target to $9 billion plus in revenues in terms of value.

These targets do include contributions from the LinQuest acquisition we made last year. Despite recent market disruptions in government contracting, global commitment to national security spending remains strong. With incremental funding from the Reconciliation Act and the factors discussed earlier, we believe the 5% to 8% growth targets for MTS are still achievable.

Regarding STS, we see recent soft bookings as temporary since underlying fundamentals continue to support robust opportunities as demand for energy security, energy transition and critical infrastructure solutions grows worldwide.

For profitability, our goal for 2027 was to provide $1.15 billion of EBITDA on an adjusted basis. And as you can see, this year, we're guiding a midpoint of just under $1 billion. With these growth assumptions I've just laid out an ongoing strong margin delivery, the $1.15 billion of adjusted EBITDA is within the reach for 2027.

For EBITDA margins, we had expected some dilution in MTS from the HomeSafe program. Hopefully, you'll recall that. With this being removed, our target is now 10% plus for MTS and we're modifying STS to THAAD to, say, 20% plus going forward in our targets.

Lastly, we're updating the operating cash flow target to $650 million in 2027. While the EBITDA target is unchanged, HomeSafe was designed to run on very low DSOs, which had a boost to cash flow generation in our previous targets. So the revised targets now reflect a normative working capital profile for MTS and STS.

In conclusion, you might recall that our previous EBITDA target for 2025 was $925 million which included some HomeSafe contribution. Our current 2025 guide is well above that target with no HomeSafe contribution. So this provides a good demonstration of our ability to tap multiple pathways to achieve results from our global business space with particular focus and execution on profit generation.

With that, I'll turn it back to Stuart.

Thank you, Mark. I'm on Slide 17 with some key takeaways. In closing, we delivered solid financial performance in the second quarter. We continue to execute our strategy, increasing our bid volumes and winning new contracts. We have a balanced and resilient business portfolio offering multiple pathways to growth.

We are maintaining our disciplined approach to capital allocation, as Mark shared earlier, actioning on our share buyback authorization and returning capital to shareholders. We have updated our annual guidance and importantly, our long-term targets for the impacts of HomeSafe.

We remain committed to creating shareholder value intentionally enabling future strategic optionality. So thank you for joining the call. And with that, we're happy to answer your questions. And I'll hand back to the operator to do so. Thank you.

[Operator Instructions] Our first question will go to the line of Tobey Sommer with Truist.

I appreciate the detail in your updated guidance and the long-term targets. As you were putting it together, what were the sort of upside and downside risks factors, maybe the top couple that you were considering in kind of setting those numbers?

Thanks, Tobey. Yes, quite an exercise to do in the time frame, so a big shout-out to the teams for pulling this together, particularly in the long-term outlook. We, of course, like many others are confident of increased conversion of our pipeline, I would say that that's a key factor in the funding that flows from that as the presidential budget and the Reconciliation Act that start to take shape and mature. And that's really the principal key factor in addition to actually looking at geopolitical movements and what's happening across, particularly the Middle East.

And I mean, for example, during this quarter, the situation with Iran caused close to 2 weeks delay in terms of awards and as people were worried, of course, with the broader situations billing over. So you've got to make the assumptions that things will remain in operable in a geopolitical sense, because we cannot predict that. But really, the key fundamental was really just getting the understanding where we're positioned. That's why we spent quite a bit of time in the scripted remarks, really sort of trying to strategically educate where we would be positioned in the future administration's priorities as the funding flows and the assumption is that coming flow.

And you'll notice that the targets themselves, the long-term targets will move HomeSafe, and are really floor numbers. So logically, that would mean we're at the bottom end of the CAGR ranges there, which makes perfect sense. So there -- I think we've been quite thoughtful of how we position those long-term targets.

My follow-up would be from a reputational standpoint related to HomeSafe. And with that not that specific customer, but that's set up customers, how do you feel like the company is positioned from an ability to win and retain work? Do you think that your win rates on recompetes and new business will suffer as a result of the experience?

No. I mean, HomeSafe was a joint venture. We were a joint venture partner within that environment. But no, we don't foresee any impact. I think KBR has got strong relationships with its customers. We are engaged with them every day. And in fact, that engagement has increased as a consequence of how we need to interact with the government today, and we're not seeing any impact.

Our next question will go to the line of Michael Dudas with Vertical Research.

Jamie, Stuart, Mark. Stuart, looking at Sustainable Technologies, you talked about in earlier in your presentation about the new normal. I just want to contrary that the new normal, are we talking about BBB, Big B for bill, the geopolitics. And just the sense of how -- where you were thinking maybe a year or 2 ago, where the puck was going, where the markets are. how that you're adjusting to that to allow to maintain this revenue target through 2027 and assuming pretty healthy margins to offset some of the uncertainty on the MTS side.

Yes. I think the new normal relates much to, as you rightly said, just the geopolitical shifts and where the markets are ebbing and flowing. And again, we try to provide some color on, I guess, the vision of where certain countries are growing and our position within them, which I think is a key differentiator.

I think secondly is really around the settling down of tariffs and the impact of tariffs to capital spending, and certainly how that sort of makes itself over the medium to long term. But what we're seeing today is really there was a pause because of the issues in the Middle East, but there's also the ethologies in the Middle East as well this quarter.

And we are confident that the cadence of awards will pick up as we move through into Q2. And in fact, we've announced a number of them in July already. So I think we've got some basis to make that statement.

Our next question will go to the line of Brent Thielman with D.A. Davidson.

I had a question on MTS. I know that the resolution of protests is a difficult thing to predict, especially timing. But absent that, should we anticipate a more robust second half bookings environment than what you've seen year-to-date?

It's -- I mean, we've talked through quite carefully about the size of our pipeline and that being at record scales today and bids are waiting award similarly. So if the award cadence picks up, which logically it should now the budgets are particularly reconciliation budget is coming to fruition. I think at least we want to expect a pickup in award cadence as we head through the rest of this year. And historically, it really has been the third quarter. But my expectation is that will also lead into the fourth quarter with the reconciliation.

Yes. And Brent, a reason why we were cautious in the conversion outlook for this -- impacting this year. I mentioned very specifically, we assume things will unlock trending into next year. There's been a lot of change in government, particularly in the contracting offices. And people had retired, they left for other reasons. And so despite the customer engagement at the end user level, sometimes engagements are not even possible at the contractor office level. And so the decisions coming out reside on those people, and there's less of them. And so that's why we were prudent in our outlook this year. And eventually, they'll figure it out, and I think we'll get our fair share, but I think timing is a question mark.

Okay. Understood. And then sticking with MPS in the context of the targets on the new set of targets for 2027. I guess, could you talk a little more specifically about what we would need to see over the course of the next several quarters in support of that range, presumably, maybe a few of these protests or all the protests go your way, NASA isn't too disrupted. I'm just trying to get a sense of what we need to see and not see in support of that.

I think -- well, interestingly, when we look at our outlook for this year and as we look at the CAGRs going forward, we're actually -- the CAGR is to achieve our targets are coming off quite a low base with what's happened in the European theater. So that gives us more confidence in terms of where we're starting from.

In terms of our ability to meet those targets, I think this conversion of the pipeline comes back exactly to what we said last time around. And if we win our fair share of what's in front of us, our pipeline continues to grow because the bidding environment has not changed significantly. And when you combine that with our ability to bring in our commercial skills, particularly from STS and international government, into the changing environment commercially within the U.S. government. I think we stand very well placed to meet the CAGR we put forward, and we would not put them forward if we don't think we can meet.

Well, I'll just add that the Reconciliation Act puts money to work quite quickly provided all the supports there, as I mentioned a moment ago. but we're quite concentrated in our business in the RDT&E funding area, which is a healthy recipient.

As you heard in my earlier remarks, same with O&M. And so our teams are pursuing more and bigger opportunities on some of the very specific initiatives that are high priority of the administration. And we think we're quite -- they're quite motivated to get that going quickly. We're platform diagnostic. We can really bring a lot of digital capabilities together. That's a clear emphasis with our clients. And so we're expecting that to be a successful outlook for us in the '26, '27 period and well beyond, of course.

And lastly, just to pile on a little bit is really what's happening internationally. As you've seen, there's a commitment for defense spending to rise to 5% of GDP across the European arena by 2035, with the U.K. leading the charge there somewhat, but also in Australia, and we're seeing that coming through in the growth that we are experiencing in international, which I'll remind you comes with higher margins, and it's more commercial in nature, which suits our DNA. .

There are no additional questions waiting at this time. So I will now pass the conference back over to you, Mr. Bradie for closing remarks.

Okay. Thank you very much. Just to reiterate, I'll sort of leave you with some key takeaways and thank you again for joining. We have completed a multiyear transformation becoming a leader in providing differentiated, innovative, and increasingly upmarket services, technologies and engineering solutions. And we're doing that increasingly at large scale and obviously, with a global reach.

And I would be remiss if I didn't say the quality of earnings is something we've talked about many times, and this has been and continues to be a key focus area, and you can see that coming through in the bottom line.

As you know, we serve diverse, attractive end markets. But importantly, these are aligned, we believe, with strong secular growth trends. We have amazing people, really top talent that combining deep domain expertise, which will be continually increasingly in demand, similarly with our proprietary technologies.

But as you have seen from our results, not just this quarter, but for the last several years, and in our outlook, we have an unwavering focus on execution. And we specialize in sort of key technologies, difficult solutions and solving them for our customers as well as complex, harsh and mission-critical work.

We are excellent partners. That's very much part of our DNA. I think that's going to be an increasing need into the future as we look at different solutioning. We are operating in dynamic teams to solve our customers' most complex challenges. And this has resulted in recurring long-term engagements. And of course, as we said in the script remarks, over $21.6 billion in backlog and options.

Our diversification, our asset-light model and disciplined capital allocations have and will continue to generate stable predictable cash flows and compelling shareholder returns. And we have growth and margin expansion plans in light that are billing fruit.

Finally, we remain alert and agile as we need to be in this environment. We are monitoring the current dynamic situations across the world and taking strategic and proactive solutions at pace to ensure KBR remains well positioned to deliver for our employees and customers and, of course, our shareholders.

So thank you very much for joining today's call, and of course, for your interest in KBR and we look forward to updating you again next quarter. Thank you.

That concludes today's earnings conference call. Thank you for your participation. I hope you have a great rest of your day.