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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 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. 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

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 & 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 milestones 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'll 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 these 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 just a tad, 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 spilling 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 funding will 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's -- 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 set of 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.

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 1 year or 2 years ago, where the buck 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 going 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, manifests itself over the medium term 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 volatilities 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 into next year. There's been a lot of change in government, particularly in the contracting offices. And people have 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 MTS 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 CAGRs 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 CAGRs we put forward, and we would not put them forward if we don't think we can meet them.

Well, I'll just add that the Reconciliation Act puts money to work quite quickly, provided all the support 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 flight that are bearing 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.