KBR, Inc. (KBR) Earnings

Management highlights

- Overall Business Performance * First half 2026 results came in slightly ahead of planned cadence, with a year-to-date adjusted EBITDA margin of 13%, keeping the company on track for full year targets. 35% of total company revenues are currently focused on sustainability, reflected in the company's 2025 Sustainability and Corporate Responsibility Report which also highlighted record safety performance. * 89% of full-year 2026 expected revenue is already contracted, with 80% contracted for STS and 94% contracted for MTS. Record backlog in STS and significant awarded (but unrecognized) work in MTS provide strong visibility across both businesses. * The company invested ~$190 million in the first half to strengthen its portfolio, while returning $71 million to shareholders through share repurchases. Net leverage ended the quarter at 2.3x trailing adjusted EBITDA, flat sequentially and comfortably below the 2.5x target. - STS Segment Highlights * Demand strengthened across energy security, food security, and sustainability end-markets. Q2 2026 book-to-bill was 1.5x, with a trailing 12-month book-to-bill of 1.3x. Ending backlog hit a record $5.5 billion, up 40% year-over-year, and near-term pipeline exceeds $6 billion (excluding large reimbursable LNG EPC opportunities). * 34% of year-to-date bookings are OPEC-related, mostly in the Middle East (first half bookings topped $900 million) and Americas, with longer contract durations that improve revenue visibility. Recent key awards include the first commercial pure sustainable aviation fuel (SAF) license and the Tampa Energia ammonia technology award in the Americas. - MTS Segment Highlights * Strong demand across defense systems modernization and global mission operations. 2026 expected bid volume is up ~50% year-over-year to more than $25 billion, with $10.4 billion in work currently awaiting award. * $10.6 billion in awarded work is currently under protest (including the National Science Foundation Antarctica award, Department of State Iraq award, and Classified PACOM Logistics award), which is not yet reflected in reported backlog or book-to-bill. The company is increasingly embedding software, AI, and digital capabilities into existing supported missions, and sees new opportunities in emerging priorities such as the Golden Dome defense system. * The MTS spin-off has been officially named Trinsic, reflecting its core intrinsic deep technical capabilities for government national security and space clients. - Separation Progress * The planned spin into two standalone public companies (new KBR for STS, Trinsic for MTS) remains on track for completion on January 4, 2027. All key regulatory and operational milestones are progressing as planned: the final IRS private letter ruling request was submitted in June (expected ruling in September), SEC review of the Form 10 is ongoing with a public filing expected ahead of the next earnings call. * Operational work has shifted from planning to execution: IT systems separation, contract bifurcation, procurement separation, budgeting, and organizational design are all on track. Corporate employees have been aligned to their future organizations, the Trinsic leadership team is largely in place (CEO Michael LaRoche joins in September, CFO Nick Vesey has already joined as CFO designate), and boards for both companies are being assembled. * Investor Days for both standalone companies will be held in November 2026 in New York to outline standalone strategies, financial frameworks, and long-term priorities. * The company is pre-separating simplifying organizational structures, driving productivity, reducing costs, and mitigating potential dissynergies, to position both companies for strong margins from day one. The objective for Trinsic is rate neutrality, and the objective for new KBR is a lean, scalable organization to support future growth.

Guidance

- Management reaffirmed all full-year 2026 guidance for revenue, adjusted EBITDA, adjusted EPS, and adjusted operating cash flow, maintaining prior targets with no upward or downward revision. - Full-year 2026 aggregate adjusted EBITDA margin guidance remains 12.4%, consistent with prior outlooks despite first half performance tracking ahead of plan. - Full-year STS margin guidance remains unchanged, and the long-term 10%+ margin target for MTS remains intact. - Full-year adjusted operating cash flow guidance remains unchanged, with expected cash flow normalization in the second half of 2026 after Q2 timing-related delays in Middle East collections.

Segment performance

Consolidated company: Q2 2026 revenues were $2 billion, an increase of $32 million (2%) year-over-year. Adjusted EBITDA increased $16 million to $258 million, with an adjusted EBITDA margin of 13% (up 60 basis points YoY). Sustainable Technology Solutions (STS): Q2 2026 revenues increased $31 million (2% YoY), with strong activity in Australia and the UK offset by project completions in the U.S. Adjusted EBITDA increased $22 million to $158 million, with a segment margin of 12.1% (up 190 basis points YoY). Year-to-date 2026 margins of 11.4% are modestly ahead of full-year outlook. STS contributed ~51.5% of consolidated Q2 revenue. Mission Technology Solutions (MTS, to be spun off as Trinsic): Year-to-date 2026 adjusted EBITDA margin is ~11%, which is ahead of the planned full-year outlook. 94% of 2026 full-year revenue guidance for MTS is already under contract. MTS contributed ~48.5% of consolidated Q2 revenue.

Risks & headwinds

- $10.6 billion in awarded MTS work is currently under customer protest, so it cannot be recognized in backlog, and the timing of protest resolution is outside of KBR's control, creating uncertainty around revenue recognition timing. - Geopolitical volatility in the Middle East has caused occasional timing delays in customer payments, which created temporary cash flow volatility in the first half of 2026, and further volatility could lead to additional timing disruptions, though management views this as a temporary rather than structural issue. - Quarterly margin volatility in STS is normal, driven by variable project mix and procurement content pass-through that can create fluctuations from period to period.

Analyst Q&A

• Q: How should investors think about the capital structure and financial preparedness of the two standalone companies post-separation, and what is the outlook for STS quarterly margin volatility and long-term margin trends?

  A: Management confirmed the separation process is de-risked, with both businesses performing ahead of plan and dedicated teams completing separation work without distracting from core business performance. Both companies will have industry-normal leverage ratios appropriate for their end-markets, with full details of the standalone investment theses to be presented at the November 2026 Investor Days. Management noted that quarterly STS margin volatility driven by project and procurement mix is historically normal, and the full-year 2026 STS margin outlook remains unchanged; longer-term margin profiles will be covered at Investor Day.

• Q: What is the geographic mix of recent STS awards, particularly in the Middle East, have customer activities been disrupted by regional volatility, and what cost optimization work remains ahead of separation, with any expected run-rate savings?

  A: 54% of recent STS awards were in the Americas across technology and energy projects, with 25-26% in the Middle East, maintaining a broad global geographic mix. There has been no material disruption to ongoing STS operations in the Middle East, only occasional temporary payment timing delays related to regional volatility, which have shown signs of improvement. Management noted cost simplification including real estate rationalization and footprint consolidation is already well underway for both businesses, with Trinsic structured to achieve its rate neutrality goal from day one; full details on cost savings and operating models will be shared at Investor Day.

• Q: Why are MTS margins tracking above the long-term 10% target this year, and what is the expected annual revenue run rate and margin profile for the recently awarded $8 billion 20-year NSF Antarctica project?

  A: MTS margins are running higher year-to-date (~11%) due to favorable contract closeouts, which are a normal part of managing the large global portfolio, consistent with management's expectations. The long-standing 10%+ long-term margin target for MTS remains appropriate for modeling through the end of 2026. The Antarctica project will ramp up over its first two years; historical annual revenue for the incumbent program ranges from $150 million to $300 million depending on annual activity, with no specific guidance available prior to project launch.

• Q: What standalone growth opportunities have been identified for new KBR post-separation, and what is the update on the STS pipeline and plastics recycling projects?

  A: Management noted new KBR will have a focused management team to leverage existing advantages including high barriers to entry from long-standing customer relationships and geographic reach, with new growth opportunities from emerging technologies and AI integration. AI is being combined with existing engineering expertise to deliver new physics-based AI tools for licensed ammonia plants, with two customers already testing the product, with more details to come at Investor Day. The STS $6 billion pipeline is broad-based across regions and end-markets with high conversion rates. The Mura plastics recycling project in Teesside, UK is on track to come online shortly after resolving final technical issues, with a growing project pipeline across Europe and Asia that will be updated at Investor Day.