Chapter 7

The Government Half

The larger of KBR's two businesses — Mission Technology Solutions, the piece being spun off — is the half the thesis flags for government-budget risk. It is roughly $5.6 billion of revenue at an 8.3% operating margin, with 57% of consolidated sales tied to the U.S. government. Its revenue is now shrinking on procurement delays even as margins hold, and a defensible government-services multiple for it accounts for most of KBR's entire enterprise value — leaving little for the technology half at today's price.

Source: FY2025 10-K, segment results and major-customer disclosure [1]; [2]; adjusted EBITDA per Q4 FY2025 earnings release [3].

MTS is what most people still picture when they hear "KBR": logistics, base operations, engineering and mission support for the U.S. Army, Navy, Air Force, Space Force, the intelligence agencies, NASA, and the U.K. Ministry of Defence [4]. U.S. government contracts supplied $4,427 million, or 57% of consolidated revenue, in FY2025, with another $663 million (9%) from the U.K. government — roughly two-thirds of the whole company sold to two treasuries, nearly all of it inside this one segment [5]. This is the exposure that leaves when the spin completes, and it is worth valuing on its own terms rather than as a fraction of a blended KBR.

Flat revenue, rising margin, softening orders

MTS revenue was essentially unchanged in FY2025 — up $26 million, to $5,581 million — despite carrying a full year of the LinQuest acquisition (closed August 2024). Strip the acquisition out and the underlying book contracted: the segment absorbed reduced activity in European Command work and in science and space programs [6]. Operating income nonetheless rose to $463 million, an 8.3% margin, from $415 million (7.5%) a year earlier — helped by a $26 million legacy claim resolution and by cost savings from the January 2025 segment realignment [7].

Source: FY2025 10-K, Results of Operations by Business Segment [8].

The exit rate is weaker than the full-year figure. Fourth-quarter FY2025 MTS revenue fell 14% year on year to $1,295 million, which management attributed to EUCOM scope reductions, procurement delays across defense and intelligence clients, funding restrictions at federal civilian agencies, and delays in new awards "including awards won under protest"; book-to-bill that quarter was just 0.5x [9]. The most recent quarter (ended April 3, 2026) showed the decline moderating but persisting: MTS revenue down 6% to $1,296 million, adjusted EBITDA margin holding at 10.6%, and book-to-bill recovering to 1.1x [10]. The pattern is a business whose margin is resilient but whose top line is contracting as government awards slow.

Order-book quality carries the same caveat. MTS reported $19.1 billion of "backlog and options" at FY2025 year-end, up 15%, but firm backlog was only $12.7 billion and barely grew — the entire increase in the headline number came from options, the uncommitted portion a customer may never exercise [11].

Source: derived from FY2025 Q4 earnings release — backlog and options less firm backlog [12].

The budget backdrop cuts both ways

The near-term signal is genuinely soft. The federal government entered a shutdown on October 1, 2025, and KBR reported delays in both payment collection and contract awards; the administration's efficiency drive produced federal staff reductions and hiring freezes that management expects to delay awards further [13]. One nuance the earlier record understates: the Department of Government Efficiency was created by executive order in January 2025 and disbanded in November 2025 — the acronym that dominated the 2025 narrative is already gone, though KBR notes it "cannot rule out" similar initiatives, and broader procurement reform (Executive Order 14275 and a November 2025 defense-acquisition overhaul) continues [14].

Against that, the medium-term funding picture firmed. The reconciliation bill signed July 4, 2025 provides more than $150 billion in mandatory Department of Defense funding available through September 2029; NATO members agreed in June 2025 to spend 5% of GDP on defense by 2035; and the U.K. and Australia — where KBR's international government work sits — are both raising defense budgets [15]. The honest read is that MTS faces a timing problem, not a demand collapse: appropriations and awards are being delayed by process disruption, while the underlying defense budget is rising. That distinction is what separates a stock that has fallen too far from one that has fallen for cause, and the evidence so far supports the former for this segment.

Pricing the government half

MTS has no separately reported net income — a segment carries no interest or tax allocation — so it is valued on enterprise-level multiples against the government-services peers KBR itself names. Those peers trade in a wide band: Leidos and Booz Allen at roughly 9x trailing earnings, SAIC nearer 13.5x, on operating margins from 7% to 12%.

Sources: peer revenue and operating income per latest reported financials; market capitalisations and P/E as reported; EV/EBIT derived for Booz Allen and SAIC from reported net debt (Leidos debt not in the feed). MTS segment figures per FY2025 10-K [16].

MTS's 8.3% operating margin sits mid-pack — above SAIC, below Leidos — but its shrinking revenue argues for the lower end of the peer range rather than the middle. Applying 8x to 12x to MTS's $463 million of FY2025 operating income implies an enterprise value of roughly $3.7 billion to $5.6 billion, with a central estimate near $4.6 billion at 10x. This is illustrative, not a target: it rests on FY2025 operating income that included the $26 million one-off, and it does not yet reflect the standalone corporate costs the segment will carry once separated.

Source: derived — MTS operating income $463M at 8x/10x/12x EBIT, residual against KBR's ~$6.6B enterprise value; segment income per FY2025 10-K [17].

The reconciliation is where it matters. KBR's whole enterprise is worth about $6.6 billion today (roughly $4.5 billion of equity plus $2.1 billion of net debt). A mid-range government-services value for MTS of about $4.6 billion would leave only around $2.0 billion of enterprise value for Sustainable Technology Solutions — roughly 7x that segment's own-operations operating income of about $300 million (New KBR Economics), against the mid-teens multiple a licensing peer such as Technip Energies commands. That gap is the sum-of-the-parts case, seen from the government side: the market is paying a defense-services multiple for the whole company and getting the technology licensor thrown in cheap. The counter is symmetric — if MTS deserves the low end (8x, ~$3.7 billion) for its revenue decline, the implied STS value rises toward $2.9 billion and the discount narrows; and STS's own reported profit is flattered by a concentrated LNG joint venture (New KBR Economics), so its "own-operations" base is itself uncertain. The mispricing is real only if MTS holds a respectable multiple despite shrinking.

Where the debt lands

The separation also decides who carries KBR's borrowings, and that bears directly on the near-zero-equity concern a balance-sheet-minded reader would raise: net debt is about $2.1 billion, or 2.2x adjusted EBITDA, against a company whose tangible book value is negative (Earnings to Cash) [18]. The relevant precedent is Jacobs' 2024 government-services separation, where the spun-off entity raised debt and paid roughly $911 million of cash to the parent before departing [19]. KBR's own spin roadmap lists a discrete "Debt Financing" step for the departing entity ahead of the distribution [20].

The mechanics KBR has disclosed point one way, without confirming it: on the Jacobs template, the spun-off MTS would raise the debt and distribute cash to the parent, leaving New KBR (the technology business) largely deleveraged while MTS goes public carrying leverage into a soft-demand window. That would ease the negative-tangible-book concern for continuing holders but load the risk onto the government-services security. The precise split is not yet in the record — the Form 10 registration statement, which will show each successor's day-1 balance sheet, was still pending as of the latest filings [21]. Until it lands, the debt allocation is the largest unresolved variable in valuing either half, and the Form 10's leverage disclosure for MTS and New KBR is the item to read first.