KBR, Inc. (KBR) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary presents a balanced view. Financial performance and guidance are stable with slight growth expectations, but not exceptional. Product development and market strategy show potential, yet lack immediate catalysts. Expenses and financial health appear managed, though no standout shareholder return plans were announced. The Q&A reveals some uncertainties, such as NASA funding impacts and spin-off delays, tempering optimism. Overall, the lack of strong positive or negative indicators suggests a neutral sentiment, with limited short-term stock price movement expected.

Key Financial Performance

Revenue Revenues declined $95 million year-over-year, driven primarily by the planned reduction in EUCOM contingency. Excluding EUCOM, revenues were largely consistent with prior year, and there was no material impact from the Middle East conflict during the quarter.

Adjusted EBITDA Adjusted EBITDA increased by $3 million year-over-year, supported by strong program execution and favorable mix across the portfolio. Adjusted EBITDA margin expanded to 13.1%, up from 12.3% last year.

Adjusted EPS 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.

Adjusted Operating Cash Flow Adjusted operating cash flow totaled $119 million, up $28 million year-over-year, reflecting strong DSO performance and resulting in 98% adjusted OCF conversion.

Sustainable Tech Revenue Revenues were down $10 million year-over-year, primarily reflecting new awards that are still ramping and have not yet contributed meaningfully to revenue.

Sustainable Tech Adjusted EBITDA 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%.

Mission Tech Revenue 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.

Mission Tech Adjusted EBITDA 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.

Backlog (STS) Backlog ended the quarter at approximately $4.7 billion, up 9% year-over-year.

Backlog and Options (MTS) Backlog and options ended the quarter at $18.5 billion, with 39% of that funded, excluding the PFIs.

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Operating Highlights

KBR Pulse App: Launched to enhance connectivity across a distributed workforce, providing news, safety updates, and resources. It became critical during the Middle East conflict for timely updates and employee safety.

Energy Security and Transition: Secured project management services for Zallaf South Refinery in Libya, integrated field management at Majnoon Oil Field in Iraq, and a maintenance contract at SATORP in Saudi Arabia.

Critical Materials and Circularity: Won a long-term catalyst supply agreement for Indorama's ammonia operations and optimization work across chemical and material assets.

Infrastructure and Transport: Pursued water infrastructure projects in the Middle East and rail, water, and defense infrastructure in Australia.

STS Book-to-Bill Ratio: Achieved a book-to-bill ratio of 1.2x for the third consecutive quarter, with a backlog of $4.7 billion, up 9% year-over-year.

Mission Tech Book-to-Bill Ratio: Maintained a book-to-bill ratio of 1.0, with a backlog of $18.5 billion and bids awaiting award totaling $16 billion.

Spin-Off of MTS: Progressing towards a tax-free spin-off of the MTS business by January 4, 2027, to create two independent companies with distinct focuses.

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Risk or Challenges

Geopolitical Conflict in the Middle East: The ongoing conflict in the Middle East has created uncertainties, particularly in terms of resilience and restoration efforts. While no material changes in capital spending priorities have been observed, the situation could potentially disrupt operations and funding in the region.

NASA Workforce In-sourcing: NASA's potential in-sourcing of certain core workforce competencies could impact the mix of work across some programs, leading to a modest decline in revenue from NASA-related projects in the second half of the year.

Award Delays and Protests: Delays in larger contract awards and unresolved protests, particularly related to the MIST contract, have impacted the timing of anticipated ramp activity, creating revenue uncertainties in the Mission Tech segment.

Funding Risks in U.S. and Australian Defense Markets: Geopolitical and policy shifts in the U.S. and Australia could create funding risks and influence demand flow across the Government Services portfolio.

Middle East Conflict Impact on Cash Flow: The Middle East conflict may cause volatility in adjusted operating cash flow during the second quarter, reflecting potential disruptions in the region.

Program-Level Changes at NASA: Potential program-level changes at NASA, driven by workforce directives, could lead to a reduction in certain program activities, impacting revenue and operational focus.

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Guidance & Outlook

2026 Revenue Guidance: Work under contract today covers approximately 67% of 2026 revenue guidance in Sustainable Tech Solutions (STS) and 91% in Mission Tech Solutions (MTS).

Sustainable Tech Solutions (STS) Growth: STS is expected to deliver mid-teens year-over-year revenue growth in 2026, driven by award momentum and elevated service demand.

Mission Tech Solutions (MTS) Revenue Outlook: MTS revenue is expected to be flat to modestly down year-over-year in 2026, reflecting unresolved protests and potential program-level changes at NASA.

Segment Mix Impact: The dynamics in Mission Tech Solutions are reflected primarily in segment mix rather than a change in the overall 2026 outlook.

Spin-Off Transaction: The tax-free spin-off of MTS is targeted for January 4, 2027, aiming to create two independent pure-play companies with distinct investment profiles.

STS Near-Term Pipeline: STS near-term pipeline, excluding LNG, is more than $5 billion, with roughly 80% from repeat customers.

MTS Near-Term Pipeline: MTS bids awaiting award total $16 billion, with significant submissions expected in the next two quarters.

STS Margin Profile: STS margins are expected to remain above 20% in 2026, supported by technology licensing, differentiated engineering, and JV participation.

MTS Bid Volume Goal: MTS is progressing towards a bid volume goal of $25 billion in 2026, with significant submissions expected in the next two quarters.

Infrastructure and Transport in Australia: Near-term opportunities are concentrated in government-funded transport, defense, and enabling infrastructure programs, emphasizing resilience and capacity expansion.

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Shareholder Return Plan

Adjusted EPS: 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.

Open Market Repurchases: Lower average shares outstanding following open market repurchases throughout 2025.

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Key Q&A

Q:Margins in the quarter appear modestly ahead of expectations. Can you explain what came in better than expected on the margin line this quarter and the trajectory of margins and equity income for the rest of the year?

A:Margins remain in line with long-term targets of 10%+ for MTS and ~20% for STS through 2026. Contributions from the LNG project are expected to continue into early 2027. The 2027 budgeting process will include stand-alone costs for corporate structures and margin expectations for both businesses.

Q:Can you provide insights into the Brown & Root equity income contribution on a run-rate basis following the SWAT acquisition and the M&A pipeline for Brown & Root?

A:The recurring joint venture contributions generated approximately $18 million of EBITDA in the quarter, expected to increase modestly as the year progresses. On the M&A pipeline, the company is exploring opportunities in new geographies and adjacent industries, focusing on margin accretion, fit, and cultural alignment.

Q:Can you elaborate on the underlying STS margin profile excluding LNG and its trajectory compared to the long-term framework of 20%+ margin?

A:Excluding the LNG project, the STS margin profile was 16.1% in the quarter, with a base business margin of ~15%. Margin expansion opportunities exist in technology and licensing, which can exceed 20%, though timing is variable. Growth in operational OpEx under BRIS is expected to strengthen margins.

Q:What are the ebbs and flows in NASA bookings due to funding volatility, and how does this impact activity levels for the rest of the year?

A:The new NASA administrator's push for greater in-sourcing may gradually impact contractor staff, potentially affecting $50-60 million of KBR's business this year. Broader NASA budgets remain steady, with no significant issues in funding levels or service commitments.

Q:Can you discuss the visibility on replacing the LNG project in STS and the earnings power of STS in 2027 versus 2026?

A:STS has strong bookings momentum, with a pipeline of opportunities providing confidence in continued growth. Favorable project closeouts are ongoing, and new awards are ramping up. The company is confident in the ongoing performance of STS, supported by global operations and funding commitments.

Q:Can you provide more color on Middle East bookings and the impact of U.S. reducing NATO exposure or troop movements?

A:Middle East bookings remain strong, with no slowdown in activity. The company is staffing up work in Saudi Arabia, Qatar, and the UAE. U.S. troop reductions in Europe are not expected to have a material impact on KBR's business.

Q:What is the reason for the delay in the spin-off and Investor Day, and how will information be delivered in the meantime?

A:The spin-off was delayed to align with the fiscal year for accounting and salary adjustments, and to address IT complexities. Investor Day will be closer to the spin date for relevance. More color will be provided throughout the year to avoid a void in information.

Q:How large was the closeout at STS, and what is the growth trajectory for the next 2-3 years?

A:The closeout was consistent with expectations but not detailed. STS growth is driven by global opportunities in energy and food security, while MTS focuses on data, digital, and AI solutions aligned with defense priorities. Both businesses are well-positioned for medium-term growth.

Q:Are there plans to sell parts of the business during the separation process?

A:While the company is open to offers that maximize shareholder value, the current plan is to separate the businesses as they are today.

Q:How are customers in STS planning in light of elevated petrochemical prices and the impact of the war?

A:Customers are focused on security of supply and lessons learned from the war, with an emphasis on food security and gas development rather than petrochemicals. Maintenance services are expected to increase due to higher asset utilization.

Q:What elements of NASA exposure are growing, and where is the weakness?

A:Growth is seen in human spaceflight, particularly with the Artemis missions. Weakness lies in the uncertainty of contractor staff moves to government payroll, affecting one main contract.

Q:Why was guidance not raised despite a strong start to the year?

A:The company prefers not to raise guidance in Q1 due to ongoing global volatility and prudence in managing expectations.

Q:What is the status of STS projects and their potential to move forward?

A:STS is engaged in front-end designs for three LNG projects and other maturing global projects. The pipeline is supported by energy and food security drivers, providing confidence in future revenue generation.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the size of the STS closeout, citing recurring nature and consistency with expectations. Additionally, they did not provide specific growth targets for the next 2-3 years, deferring such details to the Investor Day.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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