KBR, Inc. (KBR) Q4 2019 Earnings Report, Transcript and Summary

Good day everyone and welcome to the KBR Inc Fourth Quarter 2019 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 this time. For opening remarks and introductions, I would now like to turn the call over to Vice President of Investor Relations Alison Vasquez. Please go ahead ma'am.

Good morning and thank you for attending KBR's fourth quarter and fiscal 2019 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 discuss highlights from the year, the market outlook, and our financial results and our 2020 earnings and cash flow guidance. After these remarks, we will open the call for questions. Today's earnings presentation is available on the Investors section of our website at kbr.com. I would like to remind the audience that this discussion may include 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 impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in our most recent 10-K available on our website. I'll now turn the call over to Stuart.

Thanks, Alison. I will start on Slide 4. As many of you know, I normally start off by talking about our safety performance which is by the way in 2019 was again stellar, but today we want to broaden this a little. At our Investor Day in May of 2019, I began the session by highlighting One Ocean, KBR's social outreach program, really focused on engaging with local skill children on the use and the impact of single use plastics. This was designed to give investors a real and tangible example of our sustainability efforts that are making positive difference. At KBR, we believe that not only in the way that we behave as a good corporate citizen, but also through the work that we do that KBR has a truly differentiated sustainability opportunity. And so going forward, our desire is to share and highlight more to our stakeholders in this area and on to Slide 5. So in keeping with that message, we have broadened Zero Harm and Courage to Care beyond safety, as we believe it also captures our culture around sustainability. To be clear, we believe that there is a symbiotic relationship between good business and good sustainability performance. Now looking at this slide, you will see that health safety and security remain a key component of a sustainability platform as we will not compromise on looking after our people, but we have also identified a number of social and environmental focus areas for KBR, and we will present on a different one each time, really to try and give you real tangible things that we are doing as a company that are making a positive difference. As we embarked on bringing this together and identifying and collecting all the things we do across KBR, the level of passion and the breadth of what we actually do is fantastic. So I'm excited to introduce a sustainability program today and I'm looking forward to exploring some of the things we do have on future calls. In the meantime, I'd encourage you all to read a 2019 Sustainability Report which is of course available on our website and this will give you a great insight. Now on to Slide 6, when we met in May 2018, we presented a scorecard and we committed to comeback and show you how we did, so here it is. It looks pretty good, but again as I said in May, the secret sauce they're delivering is really our culture. That's really our 33,000 exceptional people working together for the benefit of each other and One KBR, and I would like to take this opportunity to cite them publicly for all that they do. I think you're all well aware of the things highlighted, but I would be absolutely remiss if I didn't say, this was the 12th quarter in a two of meeting or exceeding expectations. So the key message is that we have and we will continue to do what we see we are going to do, as we've done for the past three years. One box that is not green is LNG, although we did win and sign an EPC that is yet to FID, but what is becoming more evident as time passes is that the other areas of our businesses are outperforming. And as such, this is becoming less important to achieving our targets even the upper range and I'll talk a little bit more about this later. So onto Slide 7 and some key highlights. So going across the top overall revenue and EBITDA up nicely with consistent margins, really showing our focus on winning the right work and strong execution. The key point to highlight is that all three segments had double digit growth, which in turn of course drove EPS growth throughout the year at or above par. True business performance is of course all about cash and I'm pleased to report that our focus on cash management is paying off big time. NI conversion of 127% speaks for itself, but I can't tell you that we are not perfect, and we believe there are still opportunities as our processes mature to further improve DSO, and Mark will talk in a little bit more about capital deployment and the flexibility in that area a little later. Now, I know it's all very nice to talk about 2019, or in fact the past 12 quarters, but I'm well aware of what people really on their mind today is talking about what we're going to do next year and beyond. And within in mind and to underpin our continued growth, the book-to-bill of 1.3 times for the year with all segments above one is a key highlight, especially given the longevity and the quality of that backlog and the fact, it does not include lock LOGCAP V or Freeport LNG. Now on to Slide 8, the quarter as you would expect is very much the same story as the year. Strong revenue and EBITDA growth with EPS growing a little bit faster due to some planned tax pickups and a little bit with the resolution of the private security matter, which is really mainly a cash upside event as we had booked most of the revenue many years ago. Backlog is in great shape, and the stand out for the quarter was technology solutions, doing an amazing job with a book-to-bill 2.1 in Q4. Onto slide 9, let's first touch on the outlook for Government Solutions. We remain upbeat about the markets we are focused on. Our areas of deep domain expertise plus a key strategic growth themes of defense modernization and human health performance aligned well to the recently appropriated 2020 DoD budget on the proposed '21 budget. The largest proposed increase we have seen in recent times to the NASA budget, combined with our leading position in science and human space flight is also very exciting and also aligns with our third to key strategic growth theme of space exploration. Internationally, our activity levels and pipeline remained robust. So, when you combine the above with a high level of secured work and I'd like to point out a very low level of re-competes in the next 12 months plus layer in LOGCAP V, the outlook is positive on well in line with our 2022 targets. On the energy side let me first touch on technology solutions. Many of our technologies line up well with a cleaner future and align with a sustainability program. The pickup to this highlights, we have a number of maturity of opportunities by growing pipeline of K-SAAT, our disruptive alkylation technology, opportunities mostly in North America and globally our ROSE technology prospects continued to look healthy. And when you combine this with a very strong level of work in hand given the Q4 bookings, technology is very much on track to meet its long-term growth targets, but we do expect a little bit of a slower start to the year, given the events in China. With the slowing of the Chinese economy, as you're well aware, LNG spot prices are at very low levels. As such with perhaps the exception of the IOC-led projects, we expect the LNG's FIBS will move to the right. Mid-term supply/demand curves do cross, so that market does remain attractive. But in 2020, our guidance factors in the current market softness. On the broader energy markets, chemicals margins have deteriorated and oil prices are also facing downward pressure, really signaling a weaker CapEx cycle. Fortunately for KBR, we have two things in our favor as we move into 2020. The first is that we have a strong backlog of recently announced an in-flight project, mostly cost reimbursable, the ramp up in 2020 and into 21. And secondly, we have a large sustaining capital business that typically sees increased activity via OPEC spending as CapEx cycles done. As such, a target set in May of last year remain intact. So all up, our outlook remains upbeat and this takes us nicely onto Slide 10. As you can see, I would expect our opportunity pipeline remains significant. In Government Solutions, we are seeing a number of larger opportunities, across engineering, space, and more recently in the logistics area, both in the U.S. and internationally that should be awarded in 2020 and could be potentially disruptive. The energy opportunities are significant and remain so, but we expect a watch particularly in LNG to move to the right. The histogram on the right has been updated and reflects the work security achieved of 22 targets. We ever been over 67% already in the shop and when you parked them in the smaller shorter duration consultancy program management IDIQ type work, this number is a bit closer to 80%. You'll recall that the lower end of a range included zero LNG and the upper range factored in just one LNG project starting in early 2020. With the businesses performing, you can see that the required contribution over all from LNG has reduced and in 2020 is quite small. This really demonstrates the transformation at KBR away from their lines on LNG and future projects truly other candles on the cake and not the cake itself. And onto Slide 11, we thought it would be worthwhile to show you the booking momentum and backlog growth to further reinforce what I was saying on the previous slide. I really think the true measure of all momentum is not simply a single good bookings quarter, but a demonstration of winning the right work that delivers true shareholder value over time. This slide shows the consistent performance of our business development teams but also demonstrates the exemplary focus on delivery. We do not win continuous profitable work unless you have a proven track record of making your customers successful. I will now hand over to Mark who will take you through the numbers in more detail. Have our capital allocation and of course guidance for 2020. Mark.

Great, thank you Stewart. I will pick it up on Slide 13 which summarizes the fiscal 2019 results. Overall, as you've heard from Stuart, the year progressed and concluded largely as expected, but strong top line growth, stable margins within our targeted ranges and other items like interest and taxes playing out as we guided. First, it's great to see how each of our segments contributed to grow during the year with Government Solutions providing the initial list off in the first half and technology and energy providing the thrust in the second half. As Stuart said and worth repeating, each segment generated double digit growth in the year and achieved its targeted margins. The growth reflects winning mostly cost reimbursable, low risk professional services across our GS and ES segments and low risk, high margin technology sales in our TS segment. We think that speaks well to our cost competitiveness, the strength of our intellectual property and the effectiveness of our business development organizations. Another aspect of the year which manifested in business capture and predictable margins, and as Stewart just alluded to, was project performance by the performance translated to a high re-compete and new business win rate, which reflects strong customer confidence in our ability to deliver. Execution also enabled us to profitably complete a number of projects, pick this being one of them within previous estimates and with no surprises along the way. Interest expense was up from 2018 as we had expected on higher debt levels. But we've recently taken action to reduce that meaningfully in 2020, which I'll cover here in a bit. As we guided throughout the year, we delivered some tax benefits in the fourth quarter, mostly comprised of R&D tax credits. This benefited the provision accordingly in 2019 and will translate to real cash savings in 2022. Adjusted EPS for the year came in at $1.69, that's up to 10% from the prior year, reflecting a combination of revenue growth, constant margins, and tax benefits partially offset by lower equity and earnings from our joint ventures and higher interest. Operating cash flow is just over $250 million, up almost $100 million from 2018, reflecting an operating cash flow to net income conversion rate of 127%, particularly strong given our double-digit top line growth rate. This primarily reflected our greater focus on working capital management, as we said we would do. We reduce DSOs by 4 days year-over-year and continue to operate at a net negative working capital at the enterprise level. In addition, as Stuart mentioned, we did get a nice bump in Q4 from the final settlement and payment of the private security matter with the U.S. government, which was the primary driver for topping our guidance for the year. Cash flow is truly a team sport. We really believe that here and this year's progress reflects really work by many folks across KBR. With solid organic growth, profitability and cash flow we improved our return on invested capital by about a percent during the year and ended up 9% really good progress toward our goal of 12% by 2022. Down the line Slide 14 and start to cover our three operating segments in a little bit more detail. First, our Government Solutions had another fantastic year with 14% revenue growth, 9% of which was organic, adjusted EBITDA margins over 10% and contributed handsomely to our cash flow performance. This segment had a big re-compete year in 2019 and finish with a near perfect track record at 98% clearly and industry leading statistics. Big wins on LOGCAP V in the Marine Corps prepositions stock program plus often extensions for the NASA Johnson Space Center Integrated Mission Operations Program and also the Critical Mission Systems Program all contributed to good earnings visibility for years to come. In addition, GS already won its largest 2020 we compete with the NASA aimed contract award announced earlier this month. In this program, we're performing cutting edge research and development alongside our colleagues at NASA in the areas of artificial intelligence, knowledge discovery, and technology information processing, and more. With this important win, our re-compete risk for the rest of 2020 is quite low. Book-to-bill for GS excluding PFIs, as we consistently reported was 1.1 for 2019. And I said earlier, this does not yet include any value attributed to LOGCAP V as it has not completely come through the protest process. The new business pipeline remains well-over 10 times annual revenue, margins were also scrolling across the board with solid project execution and highly-valued competitive solutions for our customers. Onto technology Slide 15 another strong year with organic growth at 26% and margins also at 26%, revenues in 2019 we're balanced across technology offerings in olefins, ammonia and refining with a fairly balanced mix across license, proprietary equipment, engineering and catalyst categories. The tech team did finish the year with an exceptional bookings quarter in the fourth quarter Stuart mentioned that earlier, a book-to-bill at two times, which certainly provides good momentum as we enter 2020. Now onto Energy Solutions Slide 16, 2019 was certainly an important year of transition where top line growth was restored and our service offerings in this segment continued to gain scale and geographical expansion. The segment produced 16% organic growth during the year. It also produced double-digit sequential growth the last three quarters in a row with balance sales across engineering feasibility, early saves contracts, project management, reimbursable EPC, maintenance and operations support and consulting engagements. There are no lump-sum EPC contracts in our portfolio today, which yields a lower risk, more predictable, profitable and cash generative business profile. Book-to-bill is just shy of two times for the year, which excludes as Stuart said earlier, any value attributable to the Freeport LNG EPC opportunity. In sum, we saw strong and balanced performance across all three segments this year, the particular success in protecting the base and winning new work. These attributes bodes well to continuing to perform in accordance with our long-term targets. Onto Slide 17, summarizing our capital structure and deployment priorities. More in this year, we set out to achieve meaningful de-leveraging in 2019 and we exceeded our goal. Strong EBITDA growth coupled with debt reductions brought our growth leverage ratio down to 2.7 at year end or 1.2x net. With ICTUS funding done, strong free cash flow drove cash balance higher at year end which amplified the net leverage ratio reduction. We were pleased to recently announce the successful refinancing and amendment of our credit agreement, an important element in our long-term capital deployment strategy. Consistent project execution, strong EBITDA growth, predictable cash generation and improved credit ratings allowed us to cap into the debt markets in January, February this year, and we're certainly pleased with the outcome. In connection with the refinancing, we used excess cash to reduce borrowings by about $130 million that really helped to ensure a successful execution of this transaction. The refinancing provides significantly-improved credit terms that will benefit KBR for many years to come, increasing our capital flexibility, reducing our borrowing wave by a 4 percentage point and extending the tenor like two years. The facility is now expired over 2025 and 2027. We're also pleased to announce a 25% increase in our quarterly dividend, enabled by the capital flexibility allowed under our amended financing agreement. The dividend increase reflects the successful transformation of KBR into a predictable, stable generator of earnings and deployable free cash flow and plus our net income dividend payout ratio at about 25%. Our board has also recently approved the replenishment of our share repurchase authorization to the $350 million level that we established some time ago. We do not intend to commit to or signal plan to buybacks which we may undertake absent imminent M&A or other reasons. We accordingly have not factored into repurchases relative to 2020 guidance. Speaking of guidance or I'm moving now to Slide 18 which summarizes our initial guide for 2020. The first point to make relative to our forward expectations is that we affirmed the long-term targets announced in the May, 2019 investor conference. Those targets as a reminder are to achieve a compound annual growth of 10% to 14% top line, 14% to 18% adjusted EPS, both over the 2019 through 2022 period. We also are targeting adjusted operating cash flow conversion of 90% to 110% of net income over this same period, and as I said earlier, the return on invested capital metric of 12% by 2022. Just a quick word on adjusted cash flow since this is a new term. As we laid out in our May conference, our operating cash flow targets will be adjusted to exclude the benefit of cash flow receipts that would be reported from large project advances and also the reduction of reporting and cash out flow for the burn off of such advances, as both a receipt and burn off of advances do not really affect deployable free cash flow. We want to focus and want you to focus on cash flow that is truly deployable for obvious reasons. If you need more color on this, don't hesitate to call Alison, who can walk you through this dimension which we think is important to understand. With the execution phase of ICTUS being complete, the legal costs settlements and ultimate recoveries will take their course and are of course challenging to predict relative to timing. To improve visibility of our core business performance, we will ring-fence the net effects of legal costs, adjudications and settlements on ICTUS whether their gains or losses, and we'll exclude them from our guided EPS. Similarly, our cash flow estimates do not include any effect from the substantial recoveries we ultimately expect to receive, as the arbitration and settlement processes are eventually completed. So those clarifications we believe our 2019 results are excellent start toward achieving these long-term goals and we also affirm, they are not dependent upon winning or executing any lumps from EPC work. We will however opportunistically engage in those types of projects only if terms, conditions and pricing meet our risk reward criteria, as this team has consistently demonstrated for some time. For 2020, we are guiding adjusted earnings per share of $1.80 to a $1.92, which at the midpoint represents a 10% growth rate above the $69 achieved in 2019. As for timing, we expect roughly the 40% of earnings in the first half of 2020, 60% in the second half. Other than the possible booking of LOGCAP V, we expect light booking activity in Q1 given the strong finish we just pulled off in 2019. Adjusted operating cash flow guidance for 2020 is set at $200 million to $250 million. With that, it takes a little longer this time of year, but thanks for sticking with me through that. Back to Stuart for his final remarks.

Thanks, Mark, and I'll take you to Slide 19 on growth and value. So I'll leave you with some key summary takeaway so starting at 12 o'clock. From an ESG or sustainability perspective, we believe KBR is differentiated and we are leaning forward as we progress a sustainability agenda through 2020 and beyond. We are well placed, very well placed in our chosen markets. We have low concentration risk and our backlog is attractive in its duration and its commercial profile. This underpins the delivery of sustainable growth and achieving our 2022 targets. The cash conversion profile of our book of business is delivering excellent results and will continue to generate strong free cash flow, which of course, leads to greater capital deployment flexibility. In summary, as is my norm I will close by saying, it is indeed a great time to be part of KBR. Thank you and I'll now hand the call back to the operator who will open up for questions.

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] Our first question will come from Sean Eastman with KeyBanc Capital Markets.

This is [Alex] on for Sean. I just wanted to touch on the Energy Solutions margins, which came in below our expectations. I'm just wondering, if you can provide more color on the quarter? And where do you expect this to trend throughout 2020 relative to the mid-single-digit guide given the Investor Day?

I mean, in terms of going forward, we -- our expectation is to be within that guidance in terms of mid-single-digit. So, no change there, whatsoever.

In terms of the fourth quarter, Alex, this is Mark. We are wrapping up on some new projects. We're being conservative and our bookings positions there. And in addition to that, we have one program that we are exiting that we've disclosed before. And in the Americas region, that did have some exit costs associated with it that diluted the margins a little bit in the fourth quarter, but that should be done.

Very helpful. And then, we were encouraged with the LOGCAP news earlier this month with the transition date set for March 2nd. I'm just wondering since the date to file appeal has passed, is there any update on that? And is the transition time period still expected for around 6 months for a September timeframe?

Yes, I mean, no real update on the appeals process. We've not had, as you have not, I mean, the award gets -- the court will come through the end of February and there will be a small window for others to appeal between that and I guess the 2nd of March. But they would have to move pretty quickly, you would think. The Army could also choose, whether there's appeal or not just to progress with the transition. In terms of the transition itself, again, our guide has been quite conservative because it's unclear us to yet as to when these task orders will come through and what the transition would look like. I mean, the expectation is that, it is perhaps a little bit easier to transition. I mean, you call being an obvious one considering where the incumbent there. We'll move a little bit quicker, maybe not to call, we'll move a little bit quicker and maybe it will be phased in Iraq and Afghanistan, but in truth, and that's why we guided conservative. We don't know and as we find that more, we'll give you more color.

Our next question will come from Jamie Cooke with Credit Suisse.

I guess, first question, on the flip side, on margins, the government margin, solutions margins came in a little better than expectations and I think Mark a pretty nice high for you guys relative to history. So, wondering if there was anything in there? And if we can look at fourth quarters, is sort of a higher run rated as we move forward given the mix and portfolio there? And then my second question just relates to ICTUS, any update on the arbitration timing of any resolution? And then my last question, I guess, if we back out Freeport or LOGCAP, how should we think about your book-to-bill for 2020 or your capability to grow backlogs?

Okay, Jamie. It's Mark here. These Government Solutions margins are expected to be in their targets for 2020, that's upper single digits and you know all the reasons for that background. We did have a healthy spike in the fourth quarter, primarily from the private security payment that we received in the fourth quarter. We had a receivable position or a chunk of it that we had not accrued for the interest, which came in, in a low double digit number to the income side. So, that was a nice benefit to receive in part in the P&L, and which was really great was the cash collection there was just about 50 million. I said that ramped up the fourth quarter total cash flow. It's not recurring, but it's in the bank and as then or will be used in our deployment strategy. So, we're certainly pleased to have that wrapped up in our favor.

Yes. And I think what is says, the arbitration on the power station will proceed this year. We still expect a judgment later this year, Jamie, but there's no guarantee in terms of how long the court get to decide, but that is still the expectation and expectation our from previous quarter has not changed. And, yes, that's probably all I can say at the moment. And then in terms of book-to-bill going into 2020, I mean, I think our pipeline is as robust and as I said, we're seeing significant activity and bidding activity, particularly in the Government Solution side of the business. And, we expect book-to-bill to grow nicely through the course of the year. On the energy side of the house, I think bookings will be under pressured and I do think that we will do reasonably well given the mix of business that I discussed in terms of the OpEx and the sustaining capital piece of our business. But I think there will be a slowdown in big greenfield awards, but I think at the same time, there will be movement in certain markets, depending on viability of those developments. But, it's difficult to assess what those bookings will be through the year. But again, concerning, we're coming from a recently little base, we are very honest about that I think we'll do pretty well in a book-to-bill basis.

We will go next to Steven Fisher with UBS.

Just Mark on the 2020 cash flow guidance, can you help us with some of the reconciling items between earnings and cash flow? Just maybe a little bit surprise with the earnings being up 10% and cash flow being down at the midpoint, and I guess, if you back up at 50 million of the receivable collection, maybe it would have been flagged. So I guess earnings up but cash flow kind of flat.

Steven, so you take out the 50 million of cash collection we would have finished just here above 200 or a fiscal 2019 the mid points to 225. So there's some nice growth there from 19 to 20 on an apples to apples basis. Relative to the reconciliation, they've got quite a bit of from that income that is, you've got quite a bit of depreciation and amortization, but we also have a pension obligation of roughly 50 million. That is a subtraction to that, and all the rest is timing of working capital. So in an ongoing growing business, we do expect to have some investments, if you will, and receivables, but we are working very hard, as Stewart said in his prepared remarks on DSO reduction. Hopefully we can offset that and those are the main items.

I mean, I think that the cash conversion I think it's well within our guide and right about 100%, actually.

Okay. That's helpful. And it sounds like you guys have been pretty cautious with what you have included as soon as in the guidance. Just, I guess, I'm curious what are the most important things that still need to happen that haven't yet happened in order to hit the guidance that you have out there?

I think we've got to continue to execute well, that's a given. I think we have to not go ahead Steven on cost and not forgiven. But ultimately, Steve, we, we've taken a reasonably pretty good position on government side, both the LOGCAP V and others. In terms of we've moved LNG essentially it was really making very little dollars there in all of 20. So, I think ultimately that de-risk that elements. So, I think really for us going in with over 70% what secured, it's really an all around execution and making sure that we deliver on the margins and in our guidance. And if we do that and with a little bit of success on the programs that we're chasing, we should do, if we should well in 2020.

We will go next to Michael Dudas with Vertical Research.

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Okay. So, in my prepared remarks, I obviously talked about large programs that we're looking at an engineering sciences space and more recently in logistics over and above LOGCAP V, that's both and outside the U.S. And I mean, these are substantial programs that were named by named at the moment and will not do so, but they're in the billions of dollars. And as I said, if they come through as we expand in 2020, I mean, they would be highly disruptive in terms of that of how we would look going into the end of 2020 and into '21. So, quite an exciting time chasing those programs, and I think, ultimately, we're very, very strong company in that arena and we stand as good a chance as anyone to be successful. So, I think that's been a big move in terms of our opportunity pipeline coming through in the last couple of quarters. And as that start to mature, we're getting more and more excited about it. And I think it says the energy business. Yes -- sorry, I'll just continue there, if you don't mind. On the energy side, we are very heavily focused in key areas. The Middle East has got a lot of activity regardless of what we're seeing in terms of pressure and that continues to be a whole bed of opportunity. And again, we're very well positioned in Saudi for ongoing work. And in Kuwait, we're seeing quite a lot of activity there. And in Oman, again, outside of that, we're very well positioned in places like Azerbaijan that they continue to invest in the future. And regardless of the downward pressure on oil, they're looking at a long-term view for their economy. And I think we're -- again very well positioned to take advantage of our long standing position in that country and our commitment to building capability and local content within Azerbaijan. So, I do -- and certainly in Saudi. So I think that, ultimately, it's about choosing your fights. It's about picking where you're going to spend your big dollars. And I think if you do not wisely, as I said earlier on when Jamie asked the question, we can do well in a difficult energy market and particularly given where we are, but also I'm coming off the face that we're at.

Yes. No need to rush that for sure. And in some of those opportunities, you think that we would see some visibility in new second half and the fourth quarter of this year that could come through at least the announcement of words of contracts?

Yes, for sure, definitely coming into the third quarter and again in the fourth quarter on some of these programs, so definitely though the course of 2020, yes.

We'll go next to Jerry Revich with Goldman Sachs.

Stuart, can you expand on your prepared remarks in terms of opportunities for you folks from rising prioritization for space investment? Do you have a sense for what the pipeline might look like on a multiyear basis? Any long-term planning that's been shared with you that you can talk about in terms of opportunities for KBR as a result of space coming up that prioritization scale?

Yes, good question. And I would just remind you that, and as I said, I think last quarter, it was interesting that as we progress through the year that the early part of the year logistics was the driving rules, and it was engineering and the latter part of the year was us the size and space. So we started to see an uptick in activity and award in the space sector already. We did announce that we had won our largest re-compete of the year at -- in NASA AIMS. So again, that will be as well for the future. We were very well positioned opposite NASA particularly in the elements of human space flight. If you can think about where the investment is going or what the political priorities are in NASA it's really to get people back to the moon and then almost to Mars. So, the optimist program initially, with a significant increase in NASA's budget, the largest, certainly, I've been aware of in recent times on the focus very much being on human space flight. There is a number of things that are coming through that we are feeling very excited about it. It's actually -- it's difficult to sort of put your finger exactly on one program. It comes to multifaceted and we've got a number of existing contract vehicles that allow us to grow without actually having to bid. And so, that's why we're excited about it. We've actually got some new programs and that we're tendering now. In fact, we had already tendered last year and so waiting for award in NASA, and we'll start to see them come through in 2020 as well. So, a lots of activity there across engineering, across I guess the whole human space flight piece and support of Artemis.

And how should we think about, when that ultimately translates into incremental sales for you folks? So, it sounds like we're expecting award to come in '20 and then potentially the revenue accelerating into '21 as a result. Is that the way to think about it? So, take the budget plus one essentially for the money to actually be spent on these programs in terms of the opportunity set for KBR.

Yes. I mean, I think the budget still needs to get approved, but I do think this still supports it to do so. And -- but you never know, it's an election year. But, I think directionally, I think that is the way to think about it, assuming that budget does go forward. You think that we would sort of grow incrementally, a lot aligned with the increase in the budget. I mean, that's typically how it goes and we've done a little bit better than that. In recent times, it's growing actually faster than budget increases as we -- because I think we're actually focusing on an area for -- the spend is actually larger than the overall budget increase. And that it appears to be consistent with where the money is being spent into the future.

We'll go next to Tobey Sommer with SunTrust.

I wanted to ask questions about the Government Solutions business in the margins, which were up nicely in the quarter. What is the margin profile of the pipeline in the bid activity? Is there any material change in sort of a contract pipe mix that would inform us about the margin trajectory going forward?

So, we don't know. We've been very consistent on our margin guidance. Its upper single digits, not some mix of what we're doing internationally and what Department of Defense or NASA for that matter all blended. And we expect that profile to remain consistent, not that sort of supports on long-range targets which again we reaffirm.

Do you have a perspective on the budget and appropriations for this year or whether we'll have one done in time or continue into a CR past the election?

I think we've had, out of the 12 years, we've got a CR and 11 of them, I think is the statistics. So, we're getting used to that and we need to plan for that to recur again. I don't think we're smart enough to say whether or not the election helps or hurts that, but we'll be hopeful other timely budget. But if it doesn't happen, we'll navigate through the year as we've done often in the past. What's important as I think we've said a few times is there, bipartisan support for strong defense spending. The request in the president's budget submission is up modestly or defense, it's up a lot for NASA as Stewart just said. And we're confident that, a good chunk of that will get through ultimately even in the election year. It's just a question of when it gets turned on in the budgeting process. And you know, if the past informs the future, it's probably the CR and it goes into December and January and then we get going.

We will go next to Michael Feniger with Bank of America.

We're nearly two months into the New Year and you've kind of mentioned the coronavirus virus. I'm just curious, it sounds like you've incorporated it into your thinking for 2020. Just help me. you can kind of flush that out at least where exactly are you thinking that the hit would be, if there is the impact of you're seeing already to maybe a slower start in Q1 with bookings or on the revenue side with you facing some tougher comps maybe? I'm curious to how you guys are incorporating that type of risk right now into your 2020 though process?

Yes. So, the main activity for us in China in terms of direct activity as relates to a technology business, but we have stuff such as strong bookings quarter in Q4 and a lot of our activities as I said is also in North America with the sort of technologies have changed the, I guess, the geographical mix a little in the business. We're not insulated, but we're more insulated than we were. We do think that bookings in technology, as I said, will be a little bit slower in the first quarter as a result of that. And even sort of progressing to what is going there is going to be impacted us, is the fact. And so that's why, we said we'll have a, I guess, we expect that to catch up. That's why we had a 40-60 split first half, second half. In terms of the rest of the business as I said, I think for the best of our energy business, the work that we have in the in-flight projects keep us insulated from the I guess the downward pressure on LNG price and things like that. So, we're in good shape there, and I think the effect on the government side is not really there at all. And I think the other thing to keep in mind is that, we are going in with 70% of work secured and that doesn't include the small stuffs that don't know about it. So, I think 70% of our work is going into this year. I think we were at 60, mid 60s last year. So a little bit more of a conservative position given some of the volatility in the world, but I think it's, you know, we're in pretty good shape and I'm pretty confident of achieving of double digit growth.

That's helpful. And just the dividend increase you guys announced just in context of how we should be thinking about M&A. There was a big asset out there, seems like companies took a very disciplined approach. So how should we view the announcements today with the dividends and the share repurchases in context of the M&A pipeline? Is there anything transformative out there? Are you guys kind of moving away from possibly those type of big transformative deals? Really focusing on what you guys have now with your platform and ability to compete as some of these bigger projects in government?

Yes, so you're quite right, we've got a very healthy pipeline. We've got double-digit organic growth. So, we don't have to rush to the finishing line and overpay or get deal fever. As you say, we're very disciplined in our approach. In terms of the way to think about the dividends and the share purchase authorization, I think you should be really excited about it. I think it's a clear signal and our belief of the future. It's a clear signal on the cost renovating qualities of the business, and I think it demonstrates our confidence and tomorrow. But it doesn't just start from our opportunity pipeline and M&A either. We've always said that, if we can find big strategic and accretive M&A that really sort of moves the needle or takes us into new areas or the new customer sets grow up the value chain. Then, we'll look at it very, very seriously, but we won't overpay. We won't get sucked into that, that death spiral. We're very clear about what we want and we're very clear that we're not going to let our desire to get there, runaway with common sense. And so far, I think we've demonstrated that you're quite right. We had a lot of disciplined around [Lummus] assets and we clearly we felt that that asset was less valuable than others. And we're going to continue outweigh, but there's quite a lot of activity today and the M&A space has seen a lot of deals and those particularly in the Government Solutions arena. And if we can identify something there that keeps us within sensible leverage ratio that is strategic, and we can get it for somebody in a way that's accretive, and, yes, we will certainly go after. So, I don't think you should be taking the dividend of the share repurchase authorization as a signal that we're not doing M&A. You should take it as a signal that was very confident about the cash generating qualities of the business. And we've always said our future and this target, our long range targets included the deployment of some of that cash.

But the 2020 guide does not, so other than the capital we've already deployed for the refinancing. I mentioned earlier other than that, which we baked into lower interest expense. Going forward, we still have some excess cash after that transaction, we will generate more during the year. An important takeaway is, how that passes deployed is all upside relative to our performance. And the flexibility we have and that deployment have been expanded through the amendment I discussed earlier.

We'll go next to Brent Thielman with D.A. Davidson.

Great, thanks. I think most the questions have been asked, but maybe Mark just to clarifying the guidance. It sounds like you've factored in sort of a flat run rate of contributions from LOGCAP V this year until get more clarity. Is that right?

We have been conservative. We have a slight uptick, but it is a conservative number particularly compared to some of the data that's out there from '18 -- sorry, '19, '18, '17 on contractor activities in those areas. But due to the uncertainty and timing, due to the transition period, we have been very conservative in the activity levels and the timing of taking over that larger scope of given we just on a perfect clarity from the customer record on one level old her.

Okay. And then the cost that you you're adjusting out associated with ICTUS creep higher in 2020 relative to what you had in 2019? What's driving that and how should we think about the cadence of that through the year?

Good question, Brendan. So, half of that number is the exact same amount that we put in the '19 adjustments for the incremental interest between '18 and '19. So, we wanted flat line if you will, the P&L effect from '18 and not have that headwind or tailwind in '19. So we equalize '18 and '19 with that adjustment last year, which was about $0.06 I think. But the other half of this year is the legal costs that we will be incurring to pursue our arbitration and other adjudication processes associated with, both the client and the parties that were our previous subcontractors. So it's 50-50 incremental interest from '18 to '19, repeated again in '20 because the debt's still there from those investments if you will and then the other half being legal costs to hopefully bring home our recoveries either in '20 or beyond.

Yes. I mean, the recoveries, potential recoveries are substantial and certainty what's the investment and legal fees to do well there? And also if we feed you while under the recoveries will adjust that as well. I mean, that will be a good cash infusion to the business and I'm sure we'll get lost the help of what to do with that cash. But, but in terms of the P&L, I mean, any upside or downside, but any upside as well will be adjusted. Actually, you can see the true underlying performance of the business, there's nothing we'll think about this. We're just trying to be as clear as possible. We don't know the quantum not the timing. So, it doesn't really reflect the true underlying performance of the business. And as we start to recover, obviously that will offset and more than offset any investment in legal fees.

We will go next to Gautam Khanna with Cowen.

So, I had a couple of questions. First -- hi, how are you guys doing? First question I had was, Mark, maybe could you quantify what the adjusted tax rate was in the fourth quarter, because it looked like it was $0.06 of the earnings. But I don't know if that's an accurate number because we don't have the adjusted tax rate.

I'll pull that up. I can tell you the full year was 22%. I was just a tad below what we had expected, 23%, 24%. We ran higher than that during the year, but we were very clear. We expected these benefits to come in. We were working on the R&D tax credit all year and button that up in the fourth quarter. And so, that is a discrete item that has important benefits to the Company including cash that we'll bring in next year. In terms of the effective rate of the fourth, I was pretty much zero from the face of the P&L. I mean, there's a credit of one provision from the fourth quarter, so call it zero.

Okay, fair enough. So it is as it appears. And then why does it lies from the 25 to 27 next in 2020 from what you had anticipated this year to be, the prior year to be, which is 23% to 25%. Is there something about?

Yes. Well, we have to be cautious in jurisdictional mix. And so, that's why there's a range there. But the main reason why there is after the R&D tax credit and uptake and uptake in the range is the effects of the Tax Reform Act of 2017. There are phase-in elements of that legislation that are mostly around making certain forms of compensation, not deductible. And so that creeps in on a per year basis and there are some headwinds there in 2020. There might going to be a modest piece after that in 2021 and then it should stabilize. I will point out that we are fortunately not subject to base erosion tax otherwise called BEAT. So, we navigated around that. So that's not hitting us, but it is that modest creep. And hopefully, we'll see jurisdictional benefits over the course of, you know, longer term that will, that will work out rate down and we're certainly working hard on that.

Okay. And then within the bid pipeline, it looks like on the government side it went up quite a bit from Q3 to Q4. And I'm just curious, reconciling that with your comments about Q1 being a bit softer in terms of bookings. Should we anticipate that is really Q2 and Q3 weighted or just a finer point on, just based on what sort of outstanding and what the adjudication timelines are of your customers. What would you I think?

I think that's like a, typically there's a rush isn't there in Q3, This was the usual a bunch of stuff. But yes, Q2 I'd be weighted heavily into Q2 and Q3. I was extension of law cap five. Of course there's low top five comes through your eyes, you know, and yet actually they've moved forward with the transition. We'll, know more about the Tasco or does and those will get boots and overseen in Q1.

Got it, but that's not in the $9 billion figure presumably, right? That's ex LOGCAP?

No, no, no. Right, that's ex LOGCAP, yes

And just to frame that 9 billion given it's a low re-compete years this year and next year, I presume that the vast majority of that is for new business. Is that right?

Yes. So that really sort of underpins incremental organic growth on. So again, that's why I'm very excited about the future. I think we're with little re-compete rates, you know, strong execution performance and the fact that we've, I think we've called fantastic business development function. I really do. I think that we will -- we'll do well going into 2020 and beyond.

And then, one last one on that. So, it shows 110 pursuits over a 100 million and I presume that's speaking to the, to be into most of the pipeline, so positioning a pursuit approval, et cetera. But are there any needle moving individual contracts or pursuing any $500 million plus type arrangements? And then lastly, the Tyndall headwind that we've talked about, you know, the 150 million in 2019 that's non-recurring. What are the offsets that you might have to grow on top of that?

Yes. I mean it's again -- so to answer your question on significant pursuits, the answer to that question is yes. We've -- I don't know, over a dozen I would say across the businesses are over 500 million or more. So I think we're feeling, again, pretty good about that. And in terms of the Tyndall headwinds, you're quite right. I mean, our top line growth is still good in GS and positive ex Tyndall and -- sorry, including Tyndall and ex-Tyndall, very much in line with the long range targets. In terms of offsets, it's interesting, as part of the NORTHCOM award, we do all the disaster relief work for the army. And so, we don't know about that today and but may be opportunities associated with disaster relief going forward and not just this year, but the current for the remainder of LOGCAP V. So, we'll again, we don't know about those, but it could be strong offset to that.

Other than the opportunities in the pipeline that we discussed, I think, there's clearly some upside a LOGCAP overall, as we undertake the new scope and if this the past performance for over contract is anywhere close to going forward, that would be positive relative to what we said our guidance on this.

We'll go next to Chad Dillard with Deutsche Bank.

So just got one questions. And it actually pertains to energy solutions operations and maintenance business. Just I am hearing about just some maintenance activity getting pushed right all of it. I was just curious whether if you're seeing that? And does that potentially mean the earnings contribution from this business maybe a little bit more backend loaded for the year? And then just take more broadly, how much of a profit contributor was it in 2019? And how you're thinking about business on the whole for 2020?

Yes, I think in my prepared remarks, Chad, we're quite clear that sustaining capital piece of the business was about half of our EBITDA and energy solutions, and we expect not to continue. We're not seeing any slippage and any of what we're chasing on the maintenance side and that activity levels remain. And so we're feeling again quite good about that in terms of our chosen market. I don't know where you hearing about maintenance activity something to the right, but certainly we are now experiencing that. And again, I think the beauty of those sustaining capital programs are underpinned typically with long-term contracts. I think, as you've heard me say publicly that, our average relationship and our maintenance portfolios 14 years. So I'm very, very akin to, I guess, government contracts to really do cost plus longer term relationship based. And, once you establish yourself reasonably good from a cash perspective and price going to downward, but good. So, yes, we're feeling pretty good about that and I don't think its weighted one way or the other because of the nature of the contracts.

And a big part of the question might be related to Brown & Root, that's a subset or a part of our role and it will, and that performed as expected in 2019 in equity and earnings. There were some other offsets in equity and earnings that we talked about during the year. That happened earlier that distorts that a little bit, but in terms of its contribution by itself, a good year and a pretty steady into 2020.

We'll take our final question from Andrew Kaplowitz with Citi.

This is Andy Lee for Andy Kaplowitz. Thanks for fit me in. I just have a one question on the ES segments. In terms of you've already talked about in your projects being pushed out to the right, but can you just talk a little bit about the terms and conditions of the projects and if you expect to see any improvements in 2020?

Yes, that has to be a balance answer. I'm afraid I think, as we're heading through '19 certainly, the competitive environments analogy was changing in the favor of getting better and more sensible times and I think that position still retains today. But we've seen it before and as the market gets softer, client behavior changes and maybe some of our competitors that do something silly. They've done it in the past and hopefully they won't do it in the future, but that's what happens and people will take advantage of that. So, I think today it's still a very attractive environment, but I think the softness continues for a long time and then people get desperate. We will not, but if people get desperate perhaps, that dynamic will change somewhat. So again, it's a bit of a balance view, but this is as honest as I can be.

I'd like to turn the conference back to Stuart Bradie for closing remarks.

Okay. So to close, 2019 was that -- it was a great year for KBR and really, in 2020, I think we're very well-positioned for continued double-digit growth and of course associated strong cash generation. I think the dividend up 25%, and we talked about this on the call. It's a clear indication of our confidence and our long-term sustainable growth and performance. And I'd just like to close by saying, we retained and remained confident of delivering that 2022 target, so very much on track to do. I think, we've performed at and above expectation. We said, we've done and said, we're going to do and then delivered against it. And that's certainly our modus operandi going forward. So, I think this is all underpinned not by a finger in the air or I wish it's actually underpinned by actually very strong level of work in hard, and the quality of the earnings and the associated cash flow with work in hand is very, very attractive, and gives confidence to stand behind those targets. So, with that, I will close and say, thank you again for your interest in KBR and for joining us this morning. Thank you.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.