Kbr, Inc. Q1 FY2021 Earnings Call

Good day, and welcome to KBR Inc. First Quarter 2021 Earnings Conference Call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introductions, I would now like to turn the call over to Ms. Alison Vasquez. Please go ahead, ma'am.

Good morning and thank you for attending KBR's first quarter 2021 earnings call. Joining us today 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 our actual results to differ significantly from these forward-looking statements. These risks are discussed in our most recent Form 10-K available on our website. I will now turn the call over to Stuart.

Thanks, Alison, and many thanks for joining us today. I will start on Slide 4. Now you should all be very familiar with our Zero Harm sustainability program, which is organized under ten pillars that fit within it across the ESG spectrum. At our recent Investor Day, we highlighted that being a good corporate citizen was the floor and not the ceiling at KBR, and I wanted to elaborate on that a little bit more today. The symbiotic relationship between shareholder value and KBR helping our clients achieve their sustainability goals is a key differentiator for KBR. Additionally, on Slide 5, KBR has a suite of recycling technologies that enable sustainable processing and the broader sustainable economy. At the Investor Day, Dow introduced Mura's revolutionary HydroPRS technology that closes the loop on the sustainable plastics economy. This is exciting on its own merit, and this excitement was compounded with the recent announcement that Dow is also significantly committing to off-take. This is obviously a huge endorsement on the sustainability aspects and importantly, a huge endorsement of the technology itself and is an important step forward. But at KBR, we have many recycling technologies as outlined on the slide. All are proprietary, differentiated, disruptive, and market-leading. We could spend the entire call talking about these technologies, but today I'll highlight just one example to give you a sense of what we are doing, and that is on sustainable fibers. A global retailer from Scandinavia came to us a few years ago to help them solve a big problem: how to recover valuable chemicals and water from what would have been a waste stream at the end of their process to produce manmade fibers. Our sustainable technology team applied our proven crystallization technology to essentially recover and purify critical ingredients and water such that they can be reintroduced right at the front of the process, effectively closing the loop on the sustainable processing. This solution has many benefits, as I'm sure you can appreciate; it reduces processing costs, saves finite elemental resources and water, and eliminates waste. So overall, it's great value for the client, KBR, and of course, the planet. Advancing our clients' ESG objectives is core to KBR's strategy and this example is just one of many that demonstrates that tenant. Now on to Slide 6 and some key highlights from the quarter. The key takeaway here is overall revenue, EBITDA margin, adjusted EPS, and cash were all in line with full-year guidance, and I would say slightly above our expectations for Q1. You'll recall that we stated that the first half versus the second half would be approximately a 40-60 split at the EPS level. That has now shifted to approximately a 45-55 split with a couple of items happening in Q1 that were expected to occur in Q2 and Q3. This was especially the case in Sustainable Technology, and Mark will give you more details on this later. Margins were right on target at the group level along with some discrete items—some ups and downs that Mark will cover later within the segments. But to be clear, full-year margin guidance at the group and within the individual segments is not changing. I'll say that again: the Q1 variations do not change full-year margin guidance. Free cash conversion at over 100% was again strong, and importantly, the team brought in over $1.6 billion in backlog and options during the quarter in high-end technical areas, increasing our total backlog with options to $90.3 billion. More on some of these wins in a moment, but super exciting. So, Q1 was a relatively clean quarter at the group level. Therefore, today's presentation should be relatively short. Overall, the business continued its momentum from 2020, and 2021 guidance remains unchanged. Now on to Slide 7. The market outlook in Government Solutions was dominated by the release of the President's proposed 2022 budgets. The DoD budget was aligned with what we presented at Investor Day, so no surprises there. KBR was very well positioned against national security and DoD strategic priorities. A few of the areas highlighted include artificial intelligence and machine learning, cyber, trusted microelectronics, and directed energy. You'll see on the right-hand side, we've recently been excited by the trusted microelectronics win to conduct advanced R&D, prototyping, laboratory testing, and supply chain verification on critical microchips and components. This is crucial work done by top-tier scientists and PhDs to ensure major military systems and platforms operate as intended and have not been compromised. We also won new work with the U.S. Space Force Rapid Capabilities Office, or RCO, to support the development and acquisition of new space capabilities and the modernization of the military space infrastructure. This is highly advanced work centered around technical R&D in the critical military space domain. Shifting a little bit over to the civil space side, the NASA budget request was released, showing a marked increase and continued support for the return to the Moon and beyond. There is also increased funding across a range of federal spending activities focused, as you would expect, initially on COVID, climate change—an area of differentiation for KBR—and social justice. The proposed infrastructure plan was also released and was technology-driven and very focused on climate, which aligns well with KBR's R&D capability and technology portfolio. This quarter we saw some great wins in the international government business, as you can see on the right-hand side of the slide, both in the U.K. and in Australia. There was also good news from a budget perspective in the U.K., which follows on from Australia increasing its defense budget last year. Moreover, our team in Australia is off to another good start, posting strong organic growth rates again at over 30% year-on-year this quarter. This is a prime example of a fantastic team doing critical work in a healthy budget environment. One aspect not on the slide but worth mentioning is the announcement on troop withdrawal from Afghanistan. As most of you are aware, we took a very conservative view in this area, which has proven to be prudent. So, in short, no red flags coming from recent announcements, no red flags from the budget priorities—in fact, very much aligned to what we presented at Investor Day—so very much aligned with our expectations. The market and our strategic positioning reaffirm our ongoing momentum. Now on to Slide 8 on sustainable technology. The market and key strategic themes shown on the slide continue to gather momentum. The recent announcements from the Biden administration are fully aligned with these themes as we discussed at Investor Day. Our suite of technologies remains in high demand, and I'm pleased to announce a disruptive PDH technology, K-PRO, that was actually launched last year and has secured its first commercial scale order. This is terrific. There are details on this on the right-hand side of the slide, but to put it simply, this technology takes low-value propane and converts it into high-value propylene in a more sustainable and cost-effective manner than the competition. It is worth noting that the book-to-bill ratio for heritage technology was 1.5 in the quarter. Led by important sales of exciting new disruptive technologies—K-PRO, K-COT, and K-SAAT—and bookings of these technologies dominated the tech book-to-bill as clients look to meet growing demand for propylene and high-value clean refining solutions with our disruptive, differentiated, and often, in our view, superior technologies. We've talked a lot about K-SAAT technology in the past, and I've just covered K-PRO. But I'd be remiss if I did not touch on K-COT and the K-COT win in the quarter, which was a substantial booking by the team. K-COT is KBR's catalytic olefins technology—it is the only technology of its kind in the market. This technology is unique in that it produces significantly higher volumes of propylene versus the fastest competing technologies, and as you know, propylene is in very high demand. Additionally, K-COT is the only commercially proven continuous operating process on the market, which means that both CapEx and OpEx costs are substantially lower and environmental impact is also greatly reduced. In other words, it's highly monetizable at lower investment and operating costs, translating into a higher ROI for our clients and advancing their sustainability agenda altogether—very compelling. Staying on the right side of the slide, we've seen an increase in the cadence of awards in our energy transition advisory business, which is a great early indicator of activity in that market. But it's clearly a step change in this activity, and the cadence of new opportunities and awards has been above our expectations. Technology-led industrial solutions also had a fantastic start to the year, and the pipeline for our digital solutions, leveraging our IP and our domain expertise helps our customers reduce costs, enhance throughput, increase efficiency while also advancing their own sustainability goals—this is resonating. As Mark will show you in a moment, sustainable technology has come out of the gate strong in Q1, and we remain confident in delivering our 2021 guidance that they will be a business that generates over $1 billion in revenue, likely a bit more, with EBITDA margins in the mid-teens. The high-end government business is a sustainable tech kicker. Now onto Slide 9 on the pipeline. In Q1, we had some really nice wins in strategic areas, as we just touched on, really following through on winning the right work. It starts on the right—you will be familiar with our stellar recompete win rate, the balanced portfolio of opportunities over $1 billion, and multiple sizable opportunities over $100 million. This shows both the overall scale of opportunity and a minimal concentration risk. The team has done a great job across the customer set, picking up over $1.6 billion in awards and options in the quarter—a pleasing result in what is typically a less fruitful bookings quarter. The key message here is that with recent budget announcements, we expect to see our pipeline remain robust. The momentum we have is expected to continue. I'll remind you we have a low recompete year in 2021 and 2022, and you can probably see why we're so bullish on the outlook. When we announced guidance in late February, we stated that we had already secured over 70% of the work required to deliver the 2021 plan. In Q1, we had excellent execution, especially in sustainable technology, and this, combined with Q1 bookings, has driven the level of secured revenue closer to 80%. So, in short, the markets and budgets remain very favorable. We continue to deliver, while also giving a big shoutout to our people who do an incredible job and do things that truly matter. We are winning work and in the differentiated areas we set out to target. Our ESG commitment directly links to shareholder value; it is super exciting and compelling, and Q1 was a great start to what is shaping up to be a great 2021 and beyond. I'll now hand it over to Mark, who will give you more color on the segments.

Awesome, Stuart, thank you. I'll pick up on Slide 11. As you just heard, Q1 performance was generally in line with our 2021 guidance expectations and also our long-range targets that we presented to you last month at our Investor Day. Revenues of $1.5 billion and $135 million of adjusted EBITDA are right in line with our fiscal 2021 guide of $6 billion top-line and 9% EBITDA margin. Cash was once again very strong out of the gate, with free cash flow conversion coming in at 109% for the quarter. What is particularly encouraging is the quality of the work coming in new orders. We are winning high technology content defense, research, and development and modernization contracts in line with our upmarket strategy. Trusted microelectronics, rapid research and development, and prototyping, among others that Stuart cited earlier, are really good examples. These programs are high priority, high barrier to entry, and in some cases leverageable to greater opportunities in the future. The same is true in sustainable technology—a stellar quarter in bookings for proprietary process technologies, including strong bookings across our new disruptive sustainability focus technologies like you heard from Stuart: K-COT, K-PRO, and K-SAAT—measured progress in energy transition advisory, and smart operations and maintenance awards. As I'll cover later, we did experience some acceleration of profit in the first quarter, which slightly rearranged our first half to second half earnings more toward a 45%-55% mix versus our initial guide of 40%-60%. But the bottom line here is that we are on track on all measures, and thus reaffirming our guidance for the year. On to Slide 12. First, as planned, we have collapsed into two segments: Government Solutions (GS) and Sustainable Technology Solutions (STS). Highlights on the GS side include 19% top-line growth, of which 5% was organic. We absorbed a headwind from reduced Middle East activity compared to last year, with new growth areas predominantly in sustaining and doing programs. We have underscored the need to reduce our dependency on the Middle East contingency work. The 15% growth in Readiness & Sustainment highlights the enormous success of our team in driving growth from new, more recurring sources that will carry forward. The fact that we achieved 15% net organic growth in light of the reduced Middle East activity is one of the top success stories this quarter, so hats off to Ella Studer and her team for delivering not only excellent service in the Middle East through all the transitions ongoing and through a global pandemic but also, at the same time, capturing and realizing tremendous growth in baseline recurring programs elsewhere in the world—is truly remarkable. Growth came from sustaining operations and maintenance funded areas such as the important work our team does to plan, schedule and support training rotations at the National Training Center. The rest of GS pretty much netted out, although I will mention, as Stuart alluded to, the Australian government business continues to produce really strong growth, up about 30% organic year-over-year offsetting some of the effect of winding down Aspire Capital Works in the U.K. We were pleased with a really nice new award that the team won in the U.K., which will start contributing to earnings later this year. I will also point out the nice balance of top-line contribution across all four business areas within GS, which is consistent with our strategic intentions of having low concentration risk, access to multiple funding channels, and access to faster funding growth streams as national priorities change. GS margins were a percentage point off of our long-term guide; this is primarily driven by timing items and provisions that we took for a legal matter. We do expect to achieve 10% EBITDA margins for the full year, with strong contributions in the back half of the year driving that home. Now for STS—we're off to a great start in Q1 and are on track to meet the full-year guide of $1 billion plus in revenue at mid-teen margins. As planned, margins are significantly improved over last year, mainly due to the fundamental improvements in business mix toward higher margin offerings and also the cost reductions we made last year in the overhead structure of that area. As Stuart mentioned, profit was amplified in the first quarter by several percentage points due to the favorable delivery of a sustainable technology project, as well as an R&D investment recovery. This result was originally planned over several quarters this year, but due to good execution, early closeout, and also accelerated cash collection of those items, we recognized all of it in Q1, which is still really a great result from the team. Overall, while we could have some margin variability this year due to timing and mix, we are confident as I said earlier, our full-year guide of revenue and $1 billion plus remains intact, along with margins in the mid-teens. Now on to Slide 13. Just a brief update here—there is no real change to our capital structure and deployment strategy, which we fully covered in the Investor Day just a few weeks ago. Net leverage edged down just one tick, driven from growth in EBITDA, to 2.3. In case you missed it, we've bumped up our dividend for the second year in a row now to $0.11 per quarter, up 10% from the 2020 dividend level. Finishing up on Slide 14, as stated, we are reaffirming guidance on all measures for the full year 2021. The guidance reflects a repositioned revenue profile in both our Government and Sustainable Technology businesses. On the government side, the guidance reflects essentially an immaterial amount of Middle East contingency operations contributions, replaced by upmarket advanced technology work and defense modernization, military and civil space, cybersecurity, and a surge in growth from sustaining readiness and sustainment programs. On the STS side, the guidance reflects lower overall revenues but much higher barrier work areas with stronger margin attributes, particularly fueled by our proprietary sustainable process technologies. These technologies, R&D, are benefiting from a significant commitment to greater energy efficiency and improved environmental outcomes across our entire contract base. This is now complemented with an attractive front-end advisory offering that is gaining traction, and a recurring smart operations and maintenance offering which leverages our large installed base of industrial and government customers worldwide. Altogether, these changes have produced a higher margin, strong cash flow business with well-established and reliable solutions in attractive end-markets. With that, I’ll turn it back to Stuart.

Thanks, Mark, and great job. On to our final slide, Slide 15. Our people continue to deliver; they really do an execution was again exemplary, and we started 2021 well—a super strong performance across the entire business. Cash conversion, which is really important, was again terrific, and our balance sheet and liquidity position, as Mark demonstrated, are both healthy. With the approximately 80% of the work secured to deliver our 2021 guide, under the strong Q1 now behind us, we are very confident in achieving 2021 and we reaffirm that guidance today. Remember that guidance reflects a 20% plus increase in adjusted EPS from a very resilient underlying performance. As we reiterated at Investor Day, we continually endeavor to do that simple thing—doing what we said we would do. So, thank you for listening, and I'll now hand it back to the operator, who will open the call up for questions.

We will now take our first question from Gautam of Cowen & Company. Please go ahead.

This is Dan on for Gautam. Good morning. Our question was, have you seen any exciting opportunities or threats just in the initial budget proposal that came through in terms of agencies?

Yes, we tried to cover that off in the presentation somewhat at Investor Day. So, no real surprises, no red flags, and quite the opposite. We are very pleased with the levels of budget, and I think the priorities didn't throw anything that disrupted our strategic advancement. That's why we're very bullish about our future; in short, no real surprises at all—only more encouragement, I would say, is a short way to describe your question.

Dan, I'll just add to that from Stuart's remarks. If you go back to the post-election moment in time, there was certainly some concern about whether or not the new administration would continue to support NASA, which had some nice increases during the Trump administration. We are really pleased to see a further 6.5% increase in the request for NASA across the board and ongoing support for human space flight missions to the moon and beyond. So that part was particularly strong, in addition to Stuart's remarks as well.

Great, that's really helpful. Thank you. Also, it currently seems like multiples in the government IT space have really compressed, whereas KBR has had a nice run recently. I'm wondering how that informs a balance between M&A versus repurchase, and whether you have seen the M&A pipeline become more active as a result of that?

Yes, I mean, obviously if your share price goes up, and if you are using that as currency, things become more affordable. But there's good recognition in the marketplace that KBR has changed significantly over time. We are getting recognition for what we actually do today. We think our targets that we're reaffirming will drive greater share price accretion over time, reflecting in our EPS performance, which will hopefully translate into share price growth over time as we laid out on Investor Day. In terms of how we think about the business, we believe we have, today, a very high-end government business, but we also have this unique sustainable technology kicker that arguably should be valued at higher multiples than that of government. So, there is certainly excitement around the marketplace as you're well aware. When it comes to the M&A market, there is still a lot of activity, and voila, consolidation will continue—however, we have been clear about our priorities regarding how we’re looking across our capital spectrum, as Mark laid those out. I don't anticipate any change with that at all. Just to reiterate, we will fund organic growth and we have robust growth ahead—over 20% upside to EPS built into our guidance, which is the best use of cash. We will increase dividends, and if we can find accretive M&A, strategically relevant, we want to pursue it. We don't just want to acquire for the sake of boosting market share; things we can do organically are more valuable. Cultural alignment matters, and it must be accretive. If we can't find a fit, we'll look to repurchase our own shares—there's no doubt about that.

We will now take our next question from Michael at Vertical Research. Please go ahead.

Two questions, first, maybe for Mark. Certainly, you're discussing these new businesses in the upmarket and margins. Could you reflect on the overall backlog margin in government solutions, and maybe with this new sustainable technology solutions from six to nine months ago where it is today? Is it going to continue to move at a steady pace? So, as you execute, could those margins flow timely for meeting your targets over the next couple of years, as it seems you're getting significant bookings at a greater pace than we've seen in recent quarters.

Thanks, Mike. We're really pleased with the quality of work, as we've repeated. In some cases, that's rewarded with strong margins, while in cases such as NASA, I think everybody knows there are lesser degrees given the economics facing that agency. In general, we see a balance in the bookings that are upmarket, which supports growth across different mix of agencies both in the U.S. and internationally. As you know, the international piece is favorable for margins; parts of the domestic are favorable for margins like Centauri and trusted microelectronics and rapid prototyping—and the continued great work we do with NASA goes the other direction. I would tell you that the bookings we've had recently in the pipeline suggest a static scenario in which we can hold margins just around 10%. If that weighting changes, we'll let you know. But right now, all signs point to stability on the margin front for government.

I appreciate that. Next follow-up is for Stuart. For the last year, we've been getting from clients about exciting opportunities in ammonia and hydrogen. Can you share whether ammonia sits in the same realm? Do you think that's more of a 12, 18, or 24 months story, or will we see some activity much quicker? Your clients are certainly asking you a ton of questions on how this works, especially with KBR's leadership in this space.

Yes, good question. On Mark's answer regarding margins, I think what we're seeing, of course, on what was heritage technology, which is a very high margin component of STS and the cadence of bookings with another book-to-bill above 1.5 this quarter versus in Q4, Q3, and Q2, are all well above one, which I think will help drive margins upwards as we look at the mix in STS going forward. So I just wanted to put that out there, because that is exciting. If we can maintain that activity level going forward, it puts upward pressure on margins, which is obviously good for everyone. Regarding the discussion on ammonia and hydrogen; yes, it is positively perceived, and both Mark and I have remarked on the cadence in the advisory business regarding energy transition and our technologies, including hydrogen, of course, as part of that solution. There's a lot of ongoing awards and studies, though not all of them will yield bigger opportunities. I think that really puts a lot of credibility on the direction the market is headed toward ammonia demand. We expect that demand to increase over time. We've got a lot of activity in the pipeline for ammonia bids; we expect some to come through in the second half of the year. Significant projects often take two to three years to be built. The hydrogen demand is impacted by ammonia, particularly as a transportation fuel. Companies are trying to get ahead of that, and discussions with major ammonia producers have also been initiated. Ammonia-related dialogue is very active, which presents a perfect storm for KBR. The refining community acknowledges the need for transformations, which is causing a great deal of activity around the application of green technology in refining. Similarly, in the Petrochem segment, we are seeing significant demand for propylene that is driving much of our activity around PDH and K-COT as we apply these technologies, particularly K-COT which is unique to KBR. So, I don't see it as merely a cyclical recovery but a redefinition of product off-takes to meet the sustainable market demands of the future with propylene. It’s a very hot market and will continue as sustainability agendas drive the sector. I believe our long-term trajectory remains strong, and while there may be fluctuations, the overall outlook is positive.

We will now take our next question from Tobey at Truist Securities. Please go ahead.

Thank you. Regarding the pipeline and bid activity, is the top of the funnel increasing, as one might expect with some of the headlines and momentum? What’s the outlook for contract size given some of the developments discussed earlier on the call?

I don’t think it’s too much about size changes per se. The size of awards from a technology perspective hasn't altered much over time. The important pieces that accompany them include very strong cash conversion dynamics and attributes alongside a high-margin profile as discussed previously. So, no significant size changes, but the opportunity, as previously mentioned, is substantial, and we're seeing it across all areas in STS. This isn't limited to just one sector; it strengthens our confidence about achieving our year-on-year revenue targets and expected mid-teen margins this year. As Mark noted, our longer-term targets remain solid, and if you recall, STS has a growing margin profile coupled with growing revenue—it's a double whammy. Hence, this is looking positive overall with the opportunity pipeline supporting that outlook.

Thank you. My follow-up question pertains to your exposure to OPTEMPO via LOGCAP. What is the outlook for that recovering to levels seen a couple of years ago? I understand we have news regarding Afghanistan, but to some degree, OPTEMPO may also be tied to pandemic developments. Could you speak to that over the medium term? Thank you.

Thanks for the question, Tobey. I think we'd all be guessing if we delve too deeply into that. The important takeaway is that we're performing well in our Readiness & Sustainment segment, which, of course, includes LOGCAP. We've experienced 15% organic growth. Most work focuses on the U.S. with only some international elements involved, and not largely derived from Middle East OCO activities. So that’s the key takeaway this quarter. Once clarity emerges moving forward, we’ll report back. I feel optimistic about this segment and GS overall. I appreciate the prudent and conservative approach we've adopted with our future guidance, alleviating any performance volatility. Therefore, we can report specifics once things are clearer. There is potential for upside as visibility improves, but I would refrain from speculating unduly; I'll provide updates as we gain more clarity.

We will now take our next question from Andy at Citigroup. Please go ahead.

Sorry if this question has already been addressed; I joined the call a bit late. However, regarding defense, particularly in the international sector, you mentioned that the decline in Q1 was primarily due to project completions. How do you see that end market trending for the rest of the year and going forward? It was strong for you for most of last year; can it resume that strength over time?

Yes, I believe so. We expect growth over time, and we've covered the budget environment, which is favorable. The U.K. has a 16% increase in defense budget, and Australia announced increases last year. The budget environment supports sustained momentum. We've announced some strong wins and noted that our Australian business continues to outperform amid fluctuations. There is healthy momentum in the budget environment, so we are well-positioned to capitalize on what lies ahead.

Thanks for that, Stuart. I also want to ask about cyclical recovery in Sustainable Technology, especially given your sizable Petrochemical and refinery exposure. Have you observed a balance in those end markets, particularly in places like China, where KBR is historically strong? How do you perceive the cyclical recovery in that business over the next 12 months?

Well, I don't believe it’s simply a cyclical recovery. There’s indeed an uptick across the technology portfolio within Petrochem, but fundamentally, the refining community realizes a transformation is necessary. We're seeing considerable activity related to applying green technology in the refining sector. In the Petrochem segment, we’re seeing significant demand for propylene driving much of our activity around PDH and K-COT as we implement these technologies, particularly K-COT which is exclusive to KBR. I don't see this as merely a cyclical rebalance, but rather a redefinition of product off-takes to match sustainable demands. I anticipate maintaining a strong market position, and while there will be quarterly fluctuations in various elements, overall satisfaction will remain high and upward momentum should follow.

We will now take our next question from Sean at KeyBanc Capital Markets. Please go ahead.

Hi guys, this is Alex on for Sean this morning. Thanks for taking our questions. First off, I wanted to inquire about the cadence of awards. A few federal contractors have cited some slowing in awards in the near term, which is understandable given the change in administration. However, do you foresee a catch-up dynamic in the pipeline?

We had an interesting quarter for awards, with total awards exceeding $1.6 billion, inclusive of options. We had a strong quarter for new awards, particularly in the NASA space. The recent program growth awards revealed a considerable influx of funding for existing projects. Typically, Q1 is a slower period for bookings, particularly after election cycles; this trend isn’t characteristic of a significant slowdown. It’s mostly seasonal; the rhythm typically sees awards spike in Q1, peak in Q2, hit a high during Q3, and fall in Q4. This seasonal cycle would likely apply to the government sector, including Sustainable Tech, leading to Q1 being a slower period due to year-end budget processes. Ultimately, our bookings this quarter are favorable for KBR, representing a solid narrative.

Yes, that makes sense. Additionally, can you provide us with an update on the Centauri integration and whether there have been changes in confidence regarding your revenue synergy targets?

The integration has been progressing successfully. Our initial focus with Centauri was to ensure we deliver those synergies we previously communicated, with a book-to-bill ratio of 1.1 maintained this quarter. This aligns with the seasonal low bookings typical of government sectors, but this reflects a stellar performance relative to expectations. Thus far, the integration is going well, and the business is performing above expectations. Hats off to the team—they're doing a terrific job, and I believe the cultural alignment proves to be exceptionally strong, which is crucial.

Thank you. That concludes the questions we have in the queue for now. I would like to turn the conference back to Stuart Bradie for any additional or closing remarks.

Thank you, Sean. Thanks again for your time and for your interest in KBR. As I noted at the beginning, we performed well this quarter, exceeding some expectations. Our sustainable tech specifically is shaping up strong. Overall, we feel good about the future—2021 outlook is optimistic based on our performance this quarter. Thank you for your continued interest, and I'm certain we’ll speak with many of you again soon. Stay safe, and we will talk again shortly. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.