KBR, Inc. (KBR) Q4 2025 Earnings Call Transcript

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Overview

The earnings call presents a mixed outlook: stable financial metrics with flat revenue guidance and consistent operating cash flow, but lowered MTS revenue growth due to delays and government shutdown impacts. Positive aspects include ongoing projects and international growth, but uncertainties around protests and vague management responses temper enthusiasm. The Q&A reveals concerns about margin stability and the need for more clarity on strategic plans, especially regarding M&A and segment sales. Without a market cap, the stock's reaction remains uncertain, likely resulting in a neutral short-term price movement.

Key Financial Performance

TRIR (Total Recordable Incident Rate) 0.033, an all-time low, reflecting strong discipline and accountability across operations.

Zero Harm Days 96 days, an all-time high, showcasing the safety culture within the company.

Operating Cash Flow $557 million, representing 110% conversion to adjusted net income, driven by strong cash generation and disciplined deployment.

Adjusted EBITDA (2025) $100 million increase year-over-year, with full-year margins at 12.4%, up more than 100 basis points, reflecting high-margin growth and cost-saving initiatives.

Adjusted EPS (2025) $3.93, up $0.60 year-over-year, supported by increased adjusted EBITDA and share repurchases, partially offset by higher interest expense and taxes.

Revenues (2025) Approximately $7.8 billion, up modestly year-over-year, driven by defense and intelligence programs, LinQuest acquisition, and sustained demand in STS.

Adjusted EBITDA (Q4 2025) $12 million increase year-over-year, with margins at 12.6%, up 190 basis points, due to disciplined program execution and favorable mix.

Adjusted EPS (Q4 2025) $0.99, up $0.09 year-over-year, reflecting stronger adjusted EBITDA performance and lower share count.

Backlog (Sustainable Tech) $4.2 billion, up 5% year-over-year and more than 20% excluding Plaquemines LNG, driven by strong book-to-bill ratios and geographical expansion.

Backlog and Options (Mission Tech) $19.1 billion, up 15% year-over-year, with 40% funded, reflecting strong alignment to national security priorities.

Capital Returned to Shareholders (2025) $413 million, the highest in the last decade, reflecting strong cash generation and disciplined capital deployment.

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Operating Highlights

INSITE 3.0: Launched through a new venture with Applied, enhancing operational performance across KBR licensed ammonia plants using physics-based AI.

Hydro-PRT recycling: Now operating continuously and producing on-spec product with ramp-up expected through 2026.

Global South expansion: Momentum in Iraq, Saudi Arabia, Kuwait, and Singapore with strong book-to-bill ratios in Q3 and Q4.

LNG and ammonia markets: Secured contracts like Abadi and Coastal Bend for LNG, and global awards in ammonia reflecting strong demand.

Australian defense market: Secured approximately $800 million in defense award contracts with high single-digit year-over-year revenue growth.

Operational excellence: Expanded margins by over 100 basis points, achieved 110% cash flow conversion, and delivered $30 million in cost savings.

Safety performance: Achieved an all-time low TRIR of 0.033 and 96% Zero Harm days.

Spin-off preparation: Progressing towards a targeted distribution in the second half of 2026 with carve-out audits and pro forma financial statements underway.

Capital deployment: Returned $413 million to shareholders, the highest in a decade, and invested $115 million in the SWAT OpEx acquisition.

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Risk or Challenges

Challenging award environment: The company faced a very challenging award environment across both segments in 2025, which could impact future growth and revenue generation.

Decline in petrochemicals CapEx: A sharp decline in petrochemicals CapEx and a pause in many green projects due to customer focus on affordability and energy security created headwinds for the Sustainable Tech segment.

Government shutdown and award delays: Mission Tech faced challenges from award delays, reduced contingency activity, particularly in Europe, and the impact of the government shutdown, which affected revenue and operational performance.

Recompete risk: The company lost the COSMOS recompete in 2025, which, while lower-margin, highlights the risk of losing future recompetes.

Ongoing commissioning challenges: The Hydro-PRT recycling technology faced ongoing commissioning challenges, which could delay ramp-up and impact operational performance.

Spin-off transaction costs: The spin-off transaction is expected to incur significant costs ($140 million to $180 million), which could impact financial performance in the short term.

Interest rate and foreign exchange risks: The guidance assumes modest improvement in interest rates and stable foreign exchange rates, but any adverse changes could impact financial performance.

Exposure to CapEx cycles: The company is working to reduce exposure to CapEx cycles, but this remains a risk, particularly in the Sustainable Tech segment.

EUCOM contingency reductions: Reductions in EUCOM contingency scope have impacted revenue and could continue to do so if further reductions occur.

Dependence on award cadence: Mission Tech's performance is dependent on improving award cadence, particularly in the second half of 2026, which introduces uncertainty.

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Guidance & Outlook

Revenue Expectations: For fiscal 2026, KBR is guiding revenues in the range of $7.9 billion to $8.36 billion, reflecting approximately 4% year-over-year growth.

Adjusted EBITDA: Guidance for adjusted EBITDA is set at $980 million to $1.04 billion for 2026.

Adjusted EPS: Adjusted EPS is projected to be between $3.87 and $4.22 for 2026.

Adjusted Operating Cash Flow: Guidance for adjusted operating cash flow is $560 million to $600 million for 2026.

Segment Growth: Sustainable Tech is expected to grow at low double-digit rates with long-term margins of 20%+, while Mission Tech is projected to grow at low single digits with margins of 10%+.

Capital Expenditures: Capital expenditures are expected to be in the range of $40 million to $50 million for 2026.

Tax Rate: The effective tax rate for 2026 is projected to be between 26% and 28%, reflecting a greater mix of work in the Global South.

Work Under Contract: Approximately 63% of Sustainable Tech's 2026 guidance and 82% of Mission Tech's 2026 guidance are already covered by work under contract.

Spin-Off Transaction: The spin-off transaction is anticipated in the second half of 2026, with preparations progressing as planned, including carve-out audits and pro forma financial statements.

Award Cadence: Award cadence in Mission Tech is expected to improve, particularly in the second half of 2026, supported by strong bid volume and contract vehicle leverage.

Market Trends: Sustainable Tech growth opportunities in 2026 are aligned with themes such as LNG, ammonia, and OpEx-driven markets, with a near-term pipeline of approximately $5 billion.

Defense Appropriations: The full year 2026 Defense Appropriations Act has been enacted, aligning Mission Tech with this funding and supporting expected growth.

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Shareholder Return Plan

Dividend Announcement: The Board approved an annual dividend of $0.66 per share or $0.165 per quarter for 2026, maintaining an attractive and stable dividend through the spin transaction.

Share Buyback: In 2025, the company returned a record $413 million to shareholders through buybacks and dividends.

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Key Q&A

Q:What is the pipeline in STS for sizable projects with Plaquemines closing out next year?

A:The pipeline includes a global business with significant opportunities across the globe and capability sets, including ammonia, technology, and LNG. Projects like Abadi, Coastal Bend front-end design, and others are ongoing. Mura is also ramping up with projects in their pipeline. The equity and earnings line is expected to show longevity and quality of earnings with contributions from BRIS and SWAT.

Q:What are the drivers of the 15% growth in backlog and the more exciting areas with bids awaiting award in MTS?

A:The growth is driven by wins like HHPC, Tubuti, Space Force, and Air Force awards in the digital area. International portfolio growth, particularly in Australia and the U.K., is also contributing. Increased defense spending in Europe and the U.K. positions the company well for future growth.

Q:How should we think about Plaquemines' contribution and the impact of Lake Charles or Energy Transfer pausing/canceling the project?

A:Plaquemines will contribute consistently through this year and into early next year. The company is focusing on organic and inorganic growth in this area, with a book-to-bill of 1.6 demonstrating momentum. More details will be provided at the Investor Day.

Q:What is the award environment in the U.K., and what are the expectations for growth there?

A:The U.K. had a slow award cadence in 2025 due to defense reviews and appropriations. However, clear spending priorities for 2026 are now in place, signaling a move into a growth cycle within the portfolio.

Q:What are the components of the guidance for MTS, particularly for defense and intel, readiness and sustainment, and other areas?

A:Defense and intel are up, while Science and Space are down due to NASA budget pressures. Readiness and sustainment growth depends on the success of protests. Some recompetes were lost, but they were at the lower end of margin performance. The guidance does not assume success in protests, so any success would be upside.

Q:How should we think about M&A and capital allocation pre- and post-spin?

A:The company expects net leverage of around 2 for STS and 3 for MTS. They are open to accretive and strategic acquisitions but will avoid significant transformational deals during the spin process. Capital allocation will focus on setting up strong balance sheets for both businesses.

Q:Can you rank order the growth outlook by end market in 2026 for SCS?

A:The company has several avenues of growth, including expanding footprints in Iraq and Saudi Arabia, Coastal Bend LNG feed, and technology. Double-digit growth is expected at the consolidated level, with more details to be provided at the Investor Day.

Q:Does the fourth quarter represent the run rate in activity for Mission Solutions, or should we expect a step down in 1Q?

A:The fourth quarter represents the steady run rate coming into 2026, with a tough comparison in the first and second quarters due to elevated levels in the previous year.

Q:What is the margin outlook for MTS in 2026, and what are the drivers?

A:Margins are expected to remain flat sequentially from the 2025 run rate of 10.4%. Operational performance is strong, and the mix is improving, but no uplift is assumed in the 2026 guide.

Q:What percent of revenues today is OpEx driven, and where can it head over time?

A:The company is focusing on increasing transparency around the OpEx business, particularly in BRIS and international operations. More details, including long-term contract nature and margin profiles, will be provided at the Investor Day.

Q:Are you still exploring a sale of the MPS segment, and what is the process?

A:The company is committed to shareholder value and open to approaches that enhance it. However, no specific details about the process were provided.

Q:Can you provide details on the MPS awards in protest, including timing and size?

A:Key awards in protest include Mission Iraq (~$1 billion) and K2A (similar size). The prepositioned stock in Europe protest was resolved in the company's favor. COSMOS and Diego losses are also under protest, but they are not included in the current numbers.

Q:What is the impact of AI on KBR, and how is it being integrated?

A:AI is being integrated through use case solutions with ROI, such as accelerating engineering, digital twins for facility operations, and predictive analytics. Back-office efficiency is being improved with bots and digitalized ERP systems like Microsoft Dynamics.

Q:What is the margin outlook for STS, and how is ERP implementation affecting it?

A:STS margins are expected to remain at 20-plus percent. ERP implementation has been successful without major risks, with rollouts in multiple regions proving effective.

Q:Review of Unclear Management Responses

A:Management avoided directly answering questions about the specific growth outlook by end market in 2026 for SCS, the exact percentage of revenues driven by OpEx, and the potential sale process for the MPS segment. They deferred these topics to the upcoming Investor Day, providing limited details and using vague language.

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Earnings Word Cloud

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

KBR Transcript

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