Kbr, Inc. Q2 FY2022 Earnings Call

Hello everyone and welcome to KBR, Inc.’s Q2 2022 Earnings Conference Call. My name is Melissa and I will be your moderator. I now have the pleasure of handing over to our host, Alison Vasquez, Vice President of Investor Relations to begin. Alison, over to you.

Thank you, Melissa. Good day from the UK and welcome to KBR's second quarter 2022 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 in 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, also 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 presentation. I will now turn the call over to Stuart.

Thanks, Alison, and thank you all for joining us today. I'll start on Slide 5. As you know we always kick off with a zero harm ESG focus and today I want to spend a moment on our expanding partnership with Mura, placing KBR at the center of enabling a global circular plastics economy, which is really exciting. In June, we committed to invest an additional $100 million in Mura Technology which allows us to participate more fully in this sustainably focused, high-growth advanced recycling sector with a global pioneer of advanced plastics recycling, whose mission is to enable a plastic-neutral future by providing an end-to-end solution to convert a wide range of mixed plastic waste, much of which would be destined for landfill today back into high-quality chemical feedstocks. Targeting 1 million tons of annual capacity in operation or development by 2025, Mura licenses its technology through KBR to a global client base and is also developing its own pipeline of global operations. Our investment builds on the alliance we entered into last year to be Mura’s exclusive technology licensing partner. With a very collaborative relationship, I would say we have a really great team that has already produced numerous advances in the process technology such as loop power, water recycling, modularization as you would expect, and digital operating solutions. Together, we have already licensed approximately 170,000 tons of capacity to solve the world's largest chemicals company, so we see great momentum. Now, under an expanded partnership agreement, KBR will also be the preferred services provider for Mura-led projects to support project management, engineering, integration, etc. So we are really adding value and bringing key skill sets from KBR. Last week, Mura made a significant announcement with Dow to develop multiple world-scale advanced recycling facilities in the U.S. and in Europe, collectively adding up to 600,000 tons of capacity. This announcement is a huge endorsement of the technology and represents Dow’s largest commitment to date to advance upscale recycling capabilities. This is just the beginning of what KBR and Mura can accomplish together, and we are very excited by this development. Now, moving on to Slide 6 for some key takeaways from the quarter. Before I get started, remember in Q1 we started very strong. We outperformed and we raised the guidance. This was another excellent quarter for KBR from a delivery perspective and a future earnings potential perspective. The business is firing on all cylinders, which is why we raised guidance last quarter and again why we continue to outperform this quarter. Our people delivered at every level, achieving almost 20% adjusted EBITDA growth year-on-year, which is exceptional in any market at any time. Even better, adjusted EPS growth exceeded 30%, and cash generation and conversion were highlights and met expectations. While we had puts and takes this quarter, Mark will give you some details, but overall, an outstanding result. Bookings in Q2 were terrific across both GS and SPS, culminating in a solid book-to-bill of 2.1x, which is a great performance. I will cover some of the key awards in a moment, but at a very high level, we continue to win the right work with an associated earnings profile to support our long-term targets and importantly, our margin expansion expectations. Our growing book of business underpins these targets, which we have built upon again this quarter. As you will see later, margin performance was at or above expectations across all business areas, a terrific effort by the team, which was helped a little bit by early contract resolutions and asset sales that Mark will discuss. Even without these margin increases were excellent. We also reshaped the portfolio in this quarter. We divested a couple of non-core investments and reinvested that cash in the circular economy in a meaningful way with Mura and added key digital transformation skills and customers through the VIMA acquisition in the UK, which we will touch on shortly. Now on to Slide 7, the outlook for Government Solutions has been and remains increasingly positive for KBR. I want to briefly discuss the proposed full-year 2023 defense budgets. Early days, but the President's proposed budget represents a 6% increase over 2022 levels. The House and Senate have each approved incremental increases of $37 billion and $45 billion respectively. While it's too soon to tell where this will land, all signs point north. While the budget process is in its early stages, we are encouraged by sizable increases in areas where KBR is at scale including defense modernization, RDT&E, space, intelligence, cyber, and LOGCAP, given continued activities in Europe. The cadence of awards in the U.S. and internationally accelerated through Q2, as reflected in our overall book-to-bill. We expect that pace to continue and be elevated through September towards the end of the U.S. government's fiscal year. As you've seen increased commitments from the U.S., it's important to note also from NATO in relation to supporting Ukraine across a wide array of activities. KBR not only supports the U.S. and Europe but has historically supported both UK and NATO, and we are starting to see beginnings of task orders in this area. While still early, it's too premature to predict how that will unfold, but we are clearly positioned to serve near and longer-term missions. As highlighted on the slide, strong bookings mean GS now has almost 95% of the work needed to deliver its 2022 numbers and, of course, a healthy overall backlog. We've highlighted some contract wins this quarter on the right to showcase RDT&E, DEVSECOPS, and other high-end capabilities. Awards across our defense and intelligence business saw a significant pickup this quarter via vehicles that we've talked about previously. Our strategy to expand services to new clients and increase contract ceilings is playing out across the portfolio. An excellent result by our competent capture teams. We've previously mentioned our largest recompete of the year for NASA, the ground systems on Mission Operations contract at Goddard, which was announced separately at the end of Q1 and went into bookings this quarter. This is a five-year contract worth up to $640 million. I'd like to spend a moment on the Next Gen xEVA spacesuit program for human missions to Mars, which is quite exciting. This is a 10-year, $3.5 billion IDIQ contract won by KBR as part of the Axiom Space team and is a remarkable example of large commercial contracting structures emerging from NASA today and KBR's ability to contribute in the increasing convergence of government and commercial collaborations in the space domain. This program will leverage innovative commercial applications for data and technologies, and in time transition into a spacesuit as a service model, with NASA as a key customer. This new approach encourages an emerging commercial market for various customers and also grants NASA the right to use the same technologies on future exploration procurement. Today, we provide maintenance and support to NASA for its ongoing operational spacesuit program, which we will continue performing. As we move forward, the wins under the new Spacesuit Program will be incremental. The first task orders to be completed include development of the first demonstration outside the space station in Lunar Orbit and for the Artemis Lunar landing. Quite exciting times ahead. Now on to Slide 8 where we showcase our expanding GS international footprint. As I said before, this part of our business is typically underappreciated, but it is a clear differentiator. Key data points show we now have a diverse workforce of around 5,000 people across 35 locations with annual revenues exceeding $1 billion. This is a high-end workforce built both organically and through acquisitions, similar to our U.S. transformation. The timeline on this slide outlines the quality of assets and workforce that have come into KBR during this period. Our capabilities in this portfolio include strategic advisory, high-end consulting, digital transformation, systems engineering, security and resilience, data science, renewable energy, and more. The business boasts a healthy CAGR of 10%, as shown here, and attractive EBITDA margins in the teens, which it has maintained. To reflect the significance of GS International, we have strengthened our Executive Team by bringing on Paul Kahn. Paul recently joined our executive ranks and reports to me as we look to grow and strengthen this part of the business. Paul has deep leadership and executive experience, having previously worked for Thales, served as CEO of Airbus UK, and held senior executive positions at Cobham. I am excited to welcome Paul to the team and I believe it reinforces our commitment to GS International. More developments on this will follow, with the addition of VIMA and increased alignment between the UK, the U.S., and Australia. For instance, AUKUS is a program we are already engaged with via Frazer-Nash. Good outcomes are on the horizon. Moving on to Slide 9, with COVID restrictions lifted in many countries, I recently returned from the Middle East and have been visiting other long-term customers, including top chemical customers. I’m absolutely enthusiastic about the STS market outlook more than ever. Our delivery performance and reputation have been very strong. Priorities for our clients are crystal clear, including energy security, intensified by the Russia-Ukraine war; gas and ammonia as a transition fuel, and significant investment in hydrogen, both blue and green; and of course, opportunities in the circular economy. All these priorities are the backdrop for long-term supply-demand imbalances driving current investment decisions. The demand for our high-end services, decarbonization capability, and technology portfolio continues to rise. Recall that our book-to-bill in Q1 was strong, and in Q2 it was even stronger. STS now has around 85% of its work contracted for 2022, alongside a very healthy backlog. Key awards in green ammonia and contracts such as the Shah Deniz project demonstrate continued momentum in sustainability, energy transition, and importantly, decarbonization of existing assets. Venture Global announced FID on their Plaquemines project. This project is essentially a replica of the Calcasieu Pass project, which is now producing LNG. Our role involves engineering, project management, integration, and commissioning support over the following three to four years. This program aligns with our identified risk profile. Our partner, Zachry, is the majority stakeholder in our joint venture and holds construction responsibility, while the client is providing many key equipment pieces, including liquefaction modules and other packages. As a minority partner in this joint venture, our profits will stem from equity earnings. Now on to Slide 10 for thoughts on STS as an essential KBR margin accelerator. STS is focused on earnings growth and margin expansion. With Venture Global entering the picture, the equity and earnings story becomes even more prominent moving forward. As you remember, we restructured this business in 2020 during COVID, exiting lump sum EPC projects and commoditized services—which we have indeed done. In 2021, we formalized our strategy around sustainability as the business's foundation, aiming to double EBITDA to over $300 million by 2025. Initially met with skepticism from investors, I believe you can now see how this team has delivered. STS is on track to generate approximately $200 million of EBITDA this year, accounting for almost 30% of KBR's annual profit. This is a significant component of our story. It posted a book-to-bill of 1.8 over the last 12 months and is ahead of pace to achieve upper teens and low twenties margins while operating with negative working capital. With strong end markets expected to grow even stronger, this business is well-positioned for future success focused on earnings growth and cash generation. I'm thrilled with the evolution of this business and its accelerated earnings and margin profile. Exciting times ahead for STS. Now, I will hand over to Mark.

Great. Thank you, Stuart. I’ll pick up on Slide 12 for highlights of the consolidated results from the quarter, then I'll address the segments after that. As Stuart noted, the team really delivered a successful Q2 across all fronts, playing an important role in critical areas like national security, space, energy security, and energy transition solutions worldwide. These roles enable our clients to enhance their global impact, positively motivating our employees in our team culture. In Q2, consolidated revenues rose by 5% to just over $1.6 billion. Adjusted EBITDA reached $186 million, reflecting a robust 19% increase from last year. This improvement showcased excellent core margins in both businesses. We also experienced some favorable outcomes flowing through the P&L, similar to Q2 last year, which I will elaborate on shortly. Adjusted EPS rose 31% year-over-year, fueled by EBITDA growth, improved tax rates, favorable foreign exchange movements, and controlled interest expenses. Hedging actions contributed positively to FX and interest results, credit to our Treasurer, Natasha, for that. Speaking of taxes, we had a one-time tax charge last year that did not recur this year, leading to a more normative tax rate of about 25% this quarter. As Stuart mentioned, we announced the $100 million investment commitment to Mura, increasing our ownership percentage to roughly 18%. We funded $60 million of this commitment in June, increasing our original 5% investment made in 2021 to its current fair market value with a $16 million unrealized gain. Consistent with past practice, we have adjusted this noncash gain out of our adjusted EPS, but it is indeed a strong reflection of the quality and value that we, along with other strategic blue-chip investors, see in Mura. Operating and free cash flow numbers improved significantly Y-o-Y, reaching $125 million and $112 million, respectively for the quarter. First half operating cash flow exceeding $200 million puts us on track for our full-year target. Deployable free cash saw terrific results at $344 million in Q2, enhancing our capital deployment capabilities. On to Slide 13 and additional details on our two operating segments. Government Solutions revenue grew by 7% in the quarter, driven by readiness and sustainment with consistent on-contract growth and increased activity with the European command. The allied response to the conflict indicates this may be a busy area for us for some time, but it's unpredictable. Even amidst some tough FX headwinds, the International sector performed well on both the revenue and profit fronts, with our Australia business leading the group with organic growth and Frazer-Nash showing significant performance too. Defense and Intelligence and Science and Space experienced flat revenue, largely due to timing delays this year and elevated material buys in 2021, but margins and profit dollars improved owing to better mix and execution. Every area within the Government business improved profit dollar contribution year-over-year, which is impressive. As Stuart noted, we monetized certain investments in the Government business this quarter for $40 million in cash and achieved a $22 million gain on asset sales, boosting reported EBITDA margins by about 165 basis points. Notably, excluding these asset gains, GS margins aligned with our targets at 10%. Now moving on to STS. This business is very active right now and growing in high-margin sectors as our strategy dictates. The pivot away from Russia and project timing have placed us slightly behind our original top-line targets, but we did produce sequential growth of nearly 20%. As Stuart highlighted, STS demonstrated strong profit delivery in Q2, and the outlook for the second half looks excellent. Our energy transition solutions are benefiting from a push toward a greener future, bolstered by robust energy prices, security investments, and supply chain constraints stemming from the Russia-Ukraine conflict. Furthermore, the energy transition is gaining traction with our government customers, a point reflected in our recent press releases from earlier this quarter. STS EBITDA in Q2 was outstanding at $55 million, with 18% margins. This quarter, STS benefited from a couple of items we advanced to Q2, but even net of these adjustments, margins still exceeded 16%. The margin expansion reflects accelerated growth in higher-margin areas of this business. To summarize, we are on course to achieve our targeted upper teens-plus margin profile. Now on to Slide 14. Our net leverage currently stands at 1.9x, benefiting from EBITDA growth, strong cash flows, and Q2 debt reductions, offsetting rising interest rates. Interest rate swaps we set previously under more favorable rate conditions also assist us in this regard. This quarter, our treasury was boosted by the first tranche of recoveries related to the Ichthys subcontractor resolution, plus $190 million and another $40 million from asset sales. Q2 deployments were approximately $200 million, which included about $60 million for the first tranche of the Mura investment, $100 million in debt reduction, and $40 million in stock buybacks. We completed the VIMA acquisition today, which will impact Q3, and our capital deployment priorities remain consistent, but I'd like to emphasize our approach to capital expenditure will be cautious given the current economic and interest rate environment. Moving on to guidance on Slide 15, we're affirming our current guidance for fiscal 2022 based on solid first-half results across the board and overall favorable market conditions. We experienced a particularly good mix in Q2 and accelerated a few closeouts and advantages this quarter that were expected in H2. With 90% of our work contracted to deliver the remainder of 2022, we feel confident in our full-year guidance, and we will continue to monitor it as we proceed through the year. That covers it from me. Back to Stuart.

Thanks, Mark. Nicely done. In summary, we all agree, we closed out the first half of 2022 with substantial momentum, achieving double-digit growth in both adjusted EBITDA and adjusted EPS this quarter. Bookings were excellent, and we continue to secure work that will support our long-term targets and margin expansion. I’m excited about the trajectory of both GS and STS businesses. The market outlook for our portfolio continues to look robust, with an attractive pipeline of opportunities ahead. With the acquisition of VIMA, additional investment in Mura, debt reduction, and capital return to shareholders, we remain focused on strategic and balanced capital deployment, as we committed to do. As we’ve emphasized today, KBR is an EBITDA and EPS growth story with strong margins and proven cash conversion, with increasing contributions from equity and earnings in STS and GS International growth alongside higher margins and earnings. Furthermore, when we incorporate HomeSafe later this year, where we will fully consolidate with a 72% ownership stake, the overall revenue will not convey the full story. Moving forward, we will highlight EBITDA and EPS metrics, along with cash contributions. We have more than 90% of our work under contract for the entirety of 2022, and we are eagerly looking ahead to securing the right projects for 2023 and 2024, to solidify our long-term targets. In closing, another fantastic quarter for growth momentum on the path to 2025. Thank you for listening, and I'll now hand it back to Melissa, who will open the floor for questions.

Thank you, Stuart. Our first question today comes from Jerry Revich of Goldman Sachs. Jerry, please go ahead.

Hi, this is Adam Davis on for Jerry today. My first question is about the $1.5 billion LNG award. I appreciate that KBR's role in the joint venture will provide services outside of construction regarding its modular design, but we’ve seen recent LNG projects go over budget. Can you help us understand the risk factors the JV is responsible for, such as labor productivity, costs, and under what scenarios is the JV’s profitability at risk?

We feel really good about the risk profile. That’s a very good question, and one we anticipated under this FID. This is not a lump sum project. There is no lump sum construction risk here—our commercial model aligns with our stated risk profile. The services we offer do not carry lump sum risk. The customer is assuming risks associated with the liquefaction modules, LNG tanks, and pretreatment facilities. Although we’re playing an integration role, typical LNG project risks do not apply in this construct. Thus, you can take comfort from our stated risk profile. We’ve exited the lump sum EPC business and are not taking construction risks. Hopefully, that gives you reassurance about our risk model. Revenue will come from equity and earnings. I also want to stress that our financial estimates are based on the most conservative projections built into our long-term targets.

That helps a lot, thank you. Can you also update us on how you are thinking about revenue burn cadence in Government Solutions moving forward?

Sure, Mark here. We discussed the details for the components this quarter. We have built an excellent pipeline of significant awards. We expect to see some outcomes soon that will likely have a minor, but favorable impact this year, with a strong effect next year. Our visibility in the business is solid. Overall, we anticipate flat to modest growth quarter-over-quarter for the remainder of the year, especially when considering the effects of OEW last year. We’ve seen some delays and a lack of decisions recently, but we’re pleased with the Q2 book-to-bill performance, which gets the largest recompete out of the way. So we are winning our fair share. While the pace of decision-making can be improved, we remain bullish on the long-term outlook, comfortable with our long-term targets.

Just to add, during our prepared remarks, I mentioned the positive work coming through UCOM, which we feel is contributing. Although, as Mark highlighted, predicting that cadence is tricky, we don’t expect significant changes in the pipeline through the end of this year. Recognizing the commitment from the U.S. and NATO, we anticipate further opportunities next year.

Got it, thank you.

Thank you, Adam.

Our next question comes from Sean Eastman of KeyBanc Capital Markets. Sean, over to you.

Hi, team. Thanks for taking my questions. My first question is about the intact 2022 guidance after some strong outperformance at the segment level in the second quarter. It would be helpful to clarify how some of these gains in the second quarter were accounted for in the full year projections, specifically if there are any negative offsets underneath that, like FX. I'm looking for an update on the full year excluding previous assumptions.

Sean, that’s a very good question. The simplest answer is that we’ve experienced outstanding performance this first half of the year. We raised guidance in Q1, and as you know, we tend to be conservative. Following a strong Q2, Mark—who is more conservative—said we would revisit guidance if we see continued strong performance through the rest of the year. This is mostly about ensuring we maintain solid performance in Q3.

Okay, interesting. Thank you for that clarification. On the Plaquemines award, it's quite large, and given that it's flowing through equity earnings, I would appreciate some guidance on how to model that line going forward in terms of quarterly run rate. I assume a contract of this size could impact the STS margin target.

We expect our growth and EBITDA over the long term for STS to be 20% plus, and our margin expansion has the capacity to achieve upper teens and low 20s margins, which we are factoring in. We may need a little more time to provide a comprehensive answer. However, if you consider the underlying EPS growth we've outlined, we hope some skepticism will dissipate with today’s announcements and the margin expansion we anticipate. We will revisit this over time, but that's the best overview I can provide today.

Thank you. I will turn it over there.

Thank you for your question, Sean. Our next question comes from Brent Thielman of D.A. Davidson. Brent, over to you.

Thank you. One more question on the LNG opportunities: Are there other similar-sized prospects with this type of scope and risk profile that you're pursuing?

To be honest, we find these opportunities are few and far between regarding the commercial model. The structure VG has utilized here is unique, successfully demonstrated by Calcasieu Pass, which reduces risk considerably. Beyond that, there is a proposed Phase 2 for Plaquemines, and we'll see if that advances in the near future. VG has also announced several other LNG sales and has additional prospects in their portfolio. If we perform well, we’re well-positioned for those opportunities. However, we're not looking to re-enter the LNG EPC business on a lump sum basis. Going forward, we’ll do project management work, including current projects in the Middle East on a reimbursable basis. Our future roles will differ significantly from what they were in the past, and while commercial models may shift, we remain cautious.

I appreciate that, Stuart. On the international portion of the GS segment, you've cited a lot of potential for growth, as well as attractive margins. What's your view on the long-term organic growth potential of this segment and its ability to penetrate new international programs?

Our historical CAGRs have been around 10%, and we expect that trend to continue. We anticipate realizing synergies across Frazer-Nash and VIMA as we integrate while connecting the U.S., Australia, and the UK operations more effectively. This robust international framework—and substantial contribution to our overall business—will maintain attractive margins. We aimed to highlight the transformation taking place in this segment, paralleling our U.S. trajectory of moving up-market and differentiating our service offerings, which has historically demonstrated higher returns compared to the U.S. market. Therefore, it reinforces our confidence in GS International's continued growth.

Thank you.

Our next question comes from Andy Kaplowitz of Citigroup. Andy, please go ahead.

Good morning, everyone. It seems you’re not having significant challenges, but could you discuss how the tight global supply chain and labor markets are affecting KBR? Have any cost impacts surfaced for your margins, or have projects progressed slower than expected due to supply chain or labor issues?

Not really, Andy. We're primarily a services business. We performed a midyear review of salaries and other factors across the business, which have been factored into our current numbers. Our retention and recruitment figures are stabilizing after higher turnover previously, but we have addressed that. As a labor provider, we haven't faced significant supply chain challenges impacting our operations. Additionally, as Mark mentioned, our treasury team has successfully mitigated risks related to FX and interest rates, so we feel optimistic about our outlook.

Following up, you stated that STS is on track to reach $200 million in EBITDA this year. Could you provide more context around the current business outlook? It appears that cyclical and secular trends are favorable, yet you mentioned some flat growth this quarter. Can you also share initial insights on how the Inflation Reduction Act could impact KBR?

Addressing the latter question, I believe the Inflation Reduction Act introduces strong demand drivers in the U.S. We have not conducted a full assessment yet, but overall, all indicators point towards favorable prospects for us, considering the climate change initiatives and energy security funding. Many companies modeled oil prices below current market levels, which leads to increased cash flow for investment. As our clients address energy security and supply-demand imbalances, many are looking to invest. For instance, commitments from companies like Aramco and ADNOC in the Middle East are robust, heavily focused on hydrogen aspects. This aligns well with our technology portfolio. Additionally, we are witnessing an urgent increase in overall activity based on historical underinvestment in this sector. Subsequently, we have an optimistic outlook, especially with demand remaining strong as refiners and chemicals companies aim to expand their markets along with a strong focus on hydrogen solutions. Our technology and STS businesses demonstrate solid book-to-bill figures, reinforcing these trends. The result is a combination of strong demand cycles alongside the financial capability to fund necessary projects.

Thank you, I appreciate your insights.

Our next question comes from Jamie Cook of Credit Suisse. Jamie, please proceed.

Good morning. I have two questions. First, Stuart, in considering your situation versus two or five years ago, it’s evident your business model and portfolio have significantly changed. With current concerns regarding a recession in the U.S. and Europe, can you discuss KBR's earnings resilience in case of a downturn? Given your visibility and backlog, do you still see potential for earnings growth over the next 12 to 18 months?

As we conduct our strategic planning—both for this year and beyond—we emphasize the stability of our earnings portfolio, whether influenced by political, geopolitical, or economic factors. We have strategically positioned our business to endure disturbances. The focus on energy security is crucial for the foreseeable future, as is our commitment to climate goals spanning multiple years. For instance, LNG as part of our pipeline is a multi-year commitment. Our contract portfolio is diversified, and our average contract tenure stands at around 10 years, providing reassurance to our shareholders about earnings resilience. Additionally, our positioning aligns with ongoing geopolitical threats from Russia and China, ensuring sustained funding for various programs. We are optimistic that investments in key areas we've highlighted will continue regardless of economic downturns.

Thank you, that's helpful. Mark, regarding your strong cash flow this quarter and healthy balance sheet, how do you view capital allocation priorities and potential for larger M&A opportunities?

We are proud of our current balance sheet and have worked diligently to maintain its status. Our approach to capital deployment will be conservative, considering uncertainties surrounding interest rates. While we recently executed the VIMA acquisition at an attractive valuation, we prefer to focus on modest acquisitions that maintain favorable pricing. We also see the possible emergence of better valuation scenarios should economic conditions change and plan to keep a reserve for that.

When we refer to these bolt-on acquisitions, it’s important to recognize their strategic significance. Digital transformation has emerged as a fundamental theme in our operations. The multiple we agreed upon for this acquisition is approximate to 10 times, targeted mid-teen CAGRs with respectable margins. Evaluating this against current market opportunities, it represents a promising investment. As Mark indicated, we expect the marketplace pressure to dissipate, and certain over-leveraged players may face challenges due to rising interest rates, providing us with opportunities to acquire at a better valuation down the line.

I appreciate the insight. Thank you.

Our next question comes from Tobey Sommer of Truist Securities. Tobey, over to you.

Thank you. Regarding the space domain, considering your firm's exposure to NASA and military intelligence, how is the growth outlook for this segment compared to the overall GS segment?

It's an excellent question, Tobey. There’s a lot of discussion and excitement about space due to increased funding from NASA and the commitment for lunar missions and beyond. Additionally, contract structures within NASA are shifting towards greater commercialization, exhibiting a mutual relationship between government and commercial sectors. Military space and Intel have seen substantial investment growth as well. Our D&I segment has seen excellent award progress in Q2 via contract vehicles like iMax. However, NASA awards have been slower than expected. While we secured our GSMO recompete promptly, several billion-dollar awards are currently in evaluation for extended periods; it's unpredictable due to varying center priorities. Yet as our performance strengthens, we’re better positioned for fruitful recompetes, assuring margins and returns. While our revenue profile may remain flat, we anticipate the growth cadence to improve with upcoming awards.

Are you investing to grow your bid and proposal teams in the Government Solutions area to capture these emerging opportunities? If so, to what extent?

Yes, we are expanding our capabilities modestly. As you would expect, this varies with specific bids. With acquisitions, we amalgamate the best skills and expertise to pursue greater opportunities that were previously unattainable. Our investment plans are included in the long-term strategy, as organic growth is the optimal approach.

Thank you.

Our next question comes from Gautam Khanna of Cowen. Gautam, over to you.

Hi, good morning. I would like updates on the timing and circumstances surrounding the HomeSafe Alliance win, especially if it remains on track for an October resolution. Additionally, in the past, you indicated Eurocom might see about $100 million of task orders related to the Russia-Ukraine situation. Can you update us on what that might look like in terms of revenue for this year and next?

The HomeSafe process is still on schedule as previously discussed. We’ve not encountered any issues that would alter the timeline we shared, so it remains set for October. Once the award is finalized, we’ll provide further updates. Now, regarding Eurocom, Mark, would you like to take that?

For the UCOM-related activities in support of the UK and Russia situation, we remain engaged with LOGCAP V, as you know. The current activity has added approximately $100 million in revenues over the typical scope and we expect this pace to persist through Q3. Beyond that, it becomes harder to predict, but we expect extended engagement.

Thank you.

Our next question comes from Bert Subin of Stifel. Bert, over to you.

Thank you, and good morning. Considering your confidence in specific Government Solutions segments, if you were to differentiate between LOGCAP, international government services, and space in terms of which segment may experience faster growth as you approach the 2025 targets, how would you analyze this?

That’s a challenging question. The D&I business has shown exceptional organic growth, and while the pace of contract awards can fluctuate, strong growth in the space sector could emerge if we secure several contracts this year. However, predicting the timing is tricky. LOGCAP activities maintain unpredictable cycles, and GSI is performing consistently with around 10% CAGR. Our portfolio's strength is crucial; while all segments are performing very well, each quarter, one may surpass others based on contract timings or award fees. The enduring performance at or above expectations gives us confidence regarding realistic growth targets, which we aim to achieve promptly.

Understood, thank you. Another question on STS: With its segments including ammonia syngas, recycling, petrochemicals, inorganics, and refining, what’s your view on the other components given the current European energy crisis? How do they align with your growth targets?

Our strength lies in our diversified portfolio, which includes over 70 technologies. We are witnessing considerable activity and expect positive developments in ammonia. While the expected volume of capacity expansions may seem slow, our involvement in green and blue ammonia projects has grown. Investments continue in olefins and hydrogen technology as well. The investments in the Middle East are substantial, and clients are increasingly prioritizing these areas. We are observing higher activity and engagement than in previous years. The focus is on maintaining our selective approach in pursuing projects that align with our earnings and cash profiles, indicating our positive outlook.

So you do not anticipate a material negative impact from the events in Europe, correct? Or are you still monitoring closely?

We do not foresee a material negative impact from events in Europe; if anything, they may strengthen demand in our direction, owing to energy security concerns—enhancing the overall outlook.

Thank you. Our next question comes from Manu Close of Vertical Research. Manu, over to you.

Hi, I think this is Mike Dudas. Good afternoon, gentlemen, and Alison.

Hi Mike.

Though I won’t ask for your prediction on the UK Prime Minister race, particularly since you’ve been adding assets and talent in that region, can you provide insights into current opportunities amidst the politics? Are budgets positioned well for KBR?

Indeed, the political shift is more a change in leadership rather than a complete party overhaul, and the commitment to defense spending remains robust in the UK. The budget has already been established, which aids our operations. The ongoing geopolitical climate, particularly Brexit, requires the UK to become increasingly self-sufficient, thus enhancing project opportunities through Frazer-Nash and VIMA.

Thank you for your insights.

Thank you for your question, Mike. Our next question comes from Avi Jaroslawicz of UBS. Avi, over to you.

Hey, good morning. On the topic of NASA awards, are they currently progressing more slowly than needed? How can you frame this in terms of potential timing—are we looking at months, quarters, or even longer?

The slowness is unpredictable. We’ve had the GSMO award, which we secured quickly with no protests, and then there’s the Mossy contract, which took years of evaluation. We’ve had multiple bids awaiting outcomes for more than a year, but those timelines can vary depending on center priorities. The positive takeaway is the risk of failing to deliver on our commitments is low. Winning our largest recompete and upcoming wins will positively impact our 2023 narrative. Our strong performance positions us well for future recompetes, reflected in our margins and returns. Thus, upcoming awards offer positive potential in the following months towards the year-end.

Got it, thanks for that. And as a follow-up, what is the outlook for the STS backlog? Do you think these levels are sustainable, or should we expect declines as larger programs progress?

The $1.5 billion win enhances the backlog while sustaining momentum. We don't expect to face difficulties maintaining these levels; in fact, this market is quite robust with numerous opportunities. The key is our focus on strategic profitability and cash flow management.

Understood. Thank you for the context.

This concludes the Q&A portion of today's call. I will now hand it back to Stuart Bradie, President and CEO, for final remarks.

Thank you for your excellent questions throughout this session. We appreciate your engagement and look forward to ongoing discussions in the coming days. Thank you.

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