KBR, Inc.

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. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during that time, simply press star one on your telephone keypad. 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 Brady, 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 investor 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 two. 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. The 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 four. 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 KBS 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 their 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 five. 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 1.4 times 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 cancelled. With that in mind, however, the SDS 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 the 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 point year on year at 12.4%. delivering an adjusted EBITDA of $240 million, up 10%. This was 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% to 1% year over year. Now cash, really important. Cash was the standard 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% of adjusted EBITDA has zero exposure to the US government spending budgets, and of course, risk related to the shutdown. Within MTSUS, the majority of our portfolio, as we've discussed many times, is comprised of mission essential operational work, many of which are well-funded multi-year programs. This provides short-term resilience to the government shutdown. 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 six 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 in 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 a 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 two 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 TACA 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. SDS was also awarded a front-end engineering design contract for Kuwait Oil Company, that's for the heavy oil program, another strategic energy security project for the nation. Last but not least, SDS was awarded the feed contract for the Abadi 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 1.0 times. Backlog and options now stand at more than $23 billion, and this value represents a 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 a long-term view. On to slide seven. 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% by 0% from the previous quarter. The major addition was a classified program in Indopaycom, 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 a control to grow backlog, options, and pipeline have progressed well. and we remain confident in our strategic positioning moving forward. MTS itself delivered a 1.4 times book-to-bill in the quarter and ended with $19.7 billion in backlogging options, and that's an increase of almost $2 billion versus the prior quarter. SDS delivered a 1.2 times 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 percent 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.

Thank you, Stuart, and good morning, everyone. I'll pick up on slide nine 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-day 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 percent, with contribution from the international side and also Lindquist. That business, Lindquist, 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 percent, primarily due to Department of War strategic shifts, including customer reductions in the op tempo 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 de-emphasizing and have meaningful growth opportunities in protest and in the pipeline. Science and 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 been 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 that wants to shut down lists. 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 continued to delever, now down to a net leverage ratio of 2.2 times. 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 return 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 US government. For our US 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 five 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. 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 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 spinoff, which was previously announced on September 24th. We are spinning off our mission technology segment. which I will refer to a spin quote 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 two 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 spinoff will take place in three phases. Number one, advanced preparation. Number two, public filing and execution. And number three, post distribution. KBR is targeting completion of the spinoff by mid to late 2026. And in order to meet this date, we are broadly aiming for the timeline shown. Of course, schedules are subject to change and we'll be communicating with our investment community along the way as things progress. Today, spinoff 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 onto 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 UConn 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 12.4%, up more than 100 basis points year over year. Really, really pleasing. Adjusted DPS 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 zero exposure to the U.S. government spending budgets, and we have seen no material impacts from the shutdown through today. We continued with a disciplined capital allocation, returning over $360 million to shareholders year to date. And finally, a spinoff is progressing nicely. With that, I'll pass it back to the operator who will open the call for Q&A. Thank you.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove your question, please press star followed by 2. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to register. Our first question will go to the line of Andy Kaplowitz with Citigroup. Andy, your line is open.

Hey, good morning, everyone.

Hi, Andy.

Stuart or Mark, can you give more color to 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, you know, if you work that backwards from 23 to 27, you know, we need double digit growth in SDS 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?

yeah again good very good question and and as you rightly say it is an interplay you know there's pressure uh on the science and space budgets because of what's happening around nasa but of course there's increased spending and and we've covered off how we sit on programs like golden dome just where we think increased spending and space force and you know, and sort of 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 on the defense and Intel part of the portfolio. And I would say that R&S, you know, with the number of things that we have secured that are under protest, is well positioned, coming off a reasonably low base with a reduction in the UCAP, UCOM work this year, is well positioned to grow into next year. And when you combine that with what's happening in international, in the UK, they've come through the defence review and they're going through the process in November, maybe until 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 Fraser Nash and our defence business in the UK is very well positioned to really sort of react to that and as we've said many times at Austeria, business continues to outperform growing total 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 pretty confident that we can actually achieve uh sort of growth that we stated in the ranges that we've put out for that business in the past uh and it may well be at the we probably at the lower end of that uh as we go into next year but those decisions have not been made yet but certainly we are we are progressing towards that sort of outcome and we're confident we can continue to grow the business uh coming out of the shutdown appreciate the colors to it

Thank you.

Thank you, Andy. Our next question will go to the line of Augie Smith with DA Davidson. Augie, your line is open.

Good morning, guys. This is Augie Smith on for Brent Thielman. Good morning. So just... Thank you. So just first, so 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, there's very little impact, particularly under a shutdown environment, where things discontinue as is. We do have one particular contract that's deemed non-essential, 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 sits 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. We're 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 Artemis III going back to the Moon and Artemis IV, whether that's across what we're doing in human health performance or the work we're doing in the Brother Johnson and the SpaceSoup program, etc. So there'll be some puts and takes, and I guess more color, we'll be able to describe more color of 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 target.

Okay. Thank you for that. 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.

Yeah, 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 Blackman's. I mean, our work continues to progress well. As we've stated before, we see equity in 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 two, if you like, 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. That's aligned with our previous statements. On Lake Charles, I'll take you back to their Q2. There's been some press statements about certainly their 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 their Q2 call, and I can confirm that the EPC pricing and overall cost, including the impact of tariffs, is bang on expectation. And that has not changed. So in terms of ET, I think you should really listen in to their call, which I believe is next week, November the 5th. And they'll 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 Abadi. which is a very, very large project in Indonesia, and that work has picked off. And we continue to do work supporting Oman LNG. We're doing the PMC work in Ruwais 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.

Okay, thank you. I'll leave it there.

Thank you. Thank you, Auggie.

Thank you, Auggie. Our next question will go to the line of Michael Dudas with Vertical Research Partners. Michael, your line is open.

Yes, thank you. Good morning, Jamie, Stuart, Mark. Hi, Michael. Hi there. 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 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 update on the on the MIRA opportunities and ramp ups.

Yeah, 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 well picked up on, you know, increasing that sort of backlog by the opportunity set by 20%, I think is indicative as was the bill in the quarter. And we expect that book to build 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. 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. 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 Mura, the current situation is they continue to progress similarly to the next quarter, replacing particularly valves that ultimately have eroded, if you like, under the high pressure, high temperature environment 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 startup 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 and going into next year and it should present as 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 the typical of these commissioning challenges for the next plan. So as you would expect. So it's quite an active portfolio. Team's 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 and the industry and in the markets geographically across the world. So hats off to the team, but yeah, quite excited about the future.

Excellent. Thank you, Stuart. I mean, just quick follow-up. When you cite the protest levels, again, I know it's difficult to predict, but going into, like, when do you get the sense of a cadence? Is there, you know, is it 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?

Yeah, I think... we we certainly i think we're all aware that the government shutdown precludes those those uh protests being resolved and the award being worked even the protest that has been resolved we can't get the we can't get them to give us a start work order because there's they're not able to do that under the this environment so so there will be uh pickups the pps2 uh people should stalk in europe that has come out of protest in our favor we'll at about 160 million or so to backlog, and we'll do that once we get the work order. And as we look forward, you know, the confidential classified opportunity in the PACOM, we expect, if the government does come out of shutdown, that to be awarded before all the protests are resolved before the end of the year. It's likely the big piece of work in Iraq will be resolved in Q1. 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. There's 3 billion under protest that we've won. And resolution of that would certainly give strong momentum in the MTS segment going into 26 and into 27 for that matter.

Thank you, Stuart.

Thank you, Michael. Our next question will go to the line of Toby Summer with Truist. Toby, your line is open.

Thanks. Tell us if you've, since announcing the spin, received any interest from outside parties in acquiring either of the businesses?

Toby, 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 Mark's tutelage is progressing as expected and on track. You know, 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 for the standalone businesses in terms of existing public companies that trade at multiples? that you think match your businesses?

Yeah, 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 it so well, they still think of, I guess, red KBR back in history and don't understand the transformative effects 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 ready 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 business I mean, it's progressively grown over time, and we expect that to continue as part of the investment thesis as we look 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 Invest Today right now. And we just had a session on it this week, in fact, and it was, yeah, you could tell the room was very upbeat. So that was good. On the sustainable tech side, it's a very similar story. You know, we've talked about this last time around. There are no real comps that do what we do that are publicly traded. Loomis is rumored to be coming to market via an IPO, but I'm not privy as 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. You know, it's companies like and uh lindy and the calm and jacobs to some extent etc so we talked that through i think last quarter uh happy to sit down with you in a separate session and talk through that logic we've obviously got bankers governments who are supporting us on this transaction who laid out those comps uh and uh and you know the trading expectations that are uh 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 Loomis really goes to market before we do, we get there.

I'll just add, Toby, since the door's open a little bit here, Stuart mentioned the branding opportunity and the perception change as possible through this transaction. We view that as applying to both STS and MTS but also that's more than that you know a lot of change 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 two 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 you know 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 investments are 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.

Thank you.

Thank you, Toby.

Our next question will go to the line of Mariana Perez-Mora with Bank of America. Mariana, your line is open.

Good morning, everyone. 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?

Oh, I think it's, Mariana, good question. It's timing. Mark did talk 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 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 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 talked about that to the market in various quarters where we've seen margins bubble up or bubble down as a consequence. Some quarters we get very high margins as a consequence of having more of the licensing. 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 SDS. And we talked about the contribution from Plaquemines, but the contribution from Brown and Root. is up markedly as well, and that comes through the equity, which is a sustaining piece of our portfolio. So I think it's, yeah, that's the answer.

So it's still the mid-teens, a sustainable near-term, or like mid-term starting.

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 round 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 maybe customer happy on that front. But if you go back to the first half of this year and you take an average of those two That is the quarterly pace that we expect by and large in 2026, but some spill over to 27. We'll probably have some volatility with that as milestones, you know, as they time, as often does in this type of business for the year, take that pace as a run rate, as a good proxy for now.

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

Oh, they're very well connected to cash. Right.

You know, this is a joint venture structure.

And, you know, we will not extract cash out of the joint venture ahead. And so I think the As we realize the profit, we will extract the cash and the customer is paying and all is well in that regard. So cash conversions 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 four to five billion range to like now like in the, I don't know, high threes. 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?

Yeah, near term is over the next six to eight 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 six to eight months. And as I said before, that excludes things like Lee 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 UK as you, because you mentioned like international strengths? How is the pipeline of opportunities there? And if they are moving in line with the expected speed?

Yeah, very good question. I don't think we spend enough time talking about our international portfolio. It continues to perform in the aggregate in the mid-teens in terms of margins. 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. They're very much part of the fabric of the Australian defence market and the Australian infrastructure and STS market for that matter. So we continue to see You know, good potential upside in the Australian market, and that's pretty clear with the very consistent on that anymore on Australia.

That's the fastest growing part of the business. It's a little more than 10% sequentially and well, you're actually now they see that and sequentially that matter. So Nick and the team doing a fabulous job there with the military customer asked about the UK. We talked about. changes in government, changes in policy, a little bit slower in that market. Teams doing the best they can with the opportunities they have. And so they're, you know, trying to up the bids. And, you know, 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, you know, 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 UK as very carefully and selectively, but certainly that's a ripe area for spend for the next several years. And so we have a developing strategy to tap that as best we can.

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

Great color. Thank you so much.

Thank you, Mariana. Our last question will go to the line of Zangeeta Jain with KeyBank Capital Markets. Sanjita, your line is open.

Excuse me, Sanjita, your line is open. You may unmute and ask your question.

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

Yeah, thanks, Megan. So in closing, I'm very excited about the future. We've 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 build 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, you know, we do remain very excited about the path for both companies, both NewKB and SpinCo. And we're confident in our ability to continue creating value for our shareholders as we progress towards executing 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.