KBR Inc (KBR) 2015 Q4 法說會逐字稿

Good day, and welcome to KBR's fourth-quarter and FY15 earnings conference call. This call is being recorded.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for KBR's fourth-quarter and FY15 earnings conference call. Today's call is also being webcast, and a replay will be available on KBR's website for seven days at www.KBR.com. The press release announcing KBR's results is also available on KBR's website.

Joining me today are Stuart Bradie, President and Chief Executive Officer; and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call, Stuart and Brian will cover KBR's financial and operational results in more detail, provide an update on our progress against our strategic objectives, and discuss our market outlook. Please refer to the Company presentation that is posted on our website at www.KBR.com. After our prepared remarks, we will open the floor to questions.

Before I turn the call over to Stuart, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. 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 KBR's fourth-quarter earnings press release, KBR's earnings presentation, KBR's Form 10-K for the period ended December 31, 2015, and KBR's current reports on Form 8-K. You can find all these documents at www.KBR.com.

Now I'll turn the call over to Stuart. Stuart?

Thank you, Zac. Good morning. Turning to slide 3, just a brief introduction on where we are on our goal towards zero harm, and our safety performance. Our total recordable incident rate for 2015 showed significant progress, over a 30% improvement over the previous year. We continue into 2016 towards the goal of zero harm. A great achievement, and really everyone at KBR is really proud of where we're heading in this particular area.

Moving on to slide 4, our year-end summary. Significant progress against our strategic objectives that we set out in December 2014. I will touch in the next slide a little bit against our scorecard that we set out when we set out our store. We exceeded EPS guidance through the fiscal year, and Brian will talk a little bit more about that later.

Good Q4, solid earnings on a back-drop of really good execution across our core businesses. We secured the Magnolia LNG project in fourth quarter 2015, which was good, and we've announced the award of the UK's Ministry of Defense MFTS contract in the fourth quarter 2016, which slipped a quarter. Hence, we just highlight it here because we expected it in the last quarter of 2015.

Our cost savings are on track. We've identified and actioned over $165 million, and we're confident we'll achieve our goal of $200 million through 2016.

We continued our good performance on our non-strategic power project delivery. Again, managed buy-out America's E&C business, and that delivered some incremental profit in the quarter. Also in the fourth quarter, we had $36 million in restructuring impairment charges. These were partially offset by the gain in the sale of assets. This really reflects our ongoing balance, it's a balancing of the business portfolio.

We also had $8 million of discrete tax charges in the quarter, really relating to the change in the UK tax rates against our tax credits. That's a one-off.

We continued with a balanced capital allocation policy. In the quarter, we returned $52 million to shareholders through dividends and buy-backs, and $109 million across the year. We continue to pay a competitive-yielding dividend, so no change there. We also acquired, very much in line with our strategy, the technology subsidiaries from Chematur in the first quarter of 2016.

Moving on to slide 5, we set out our stall very clearly and transparently at the end of 2014 -- this really the scorecard of which we should be measured. We said we would exit non-strategic businesses, those that we didn't fit -- think fit with our future strategy, or were not performing, or very little margin. I think we've now completed all the sales that we set out to do. We have closed the US minerals office, and we've had good success in closing out two of the three EPC power projects, with one of those due for completion in the first quarter of 2017 -- really good performance in this particular area.

The businesses we took to review more carefully really are industrial services business. We concluded this transaction. We sold half that business to grow it as we brought in a partner who really understood the local markets that we were operating in. That venture is starting to gain good traction, and we're very pleased with the progress there.

We moved that Canadian pipe fabrication module assembly business into a joint venture called Epic, where we hold a minority stake. Again, I think both of those very much good results during the course of the year.

We set out a target of $200 million. I've talked about that previously, and $165 million identified and actioned to date. More to come there through 2016.

Target margins we set out, technology and consulting low 20%s. We achieved 23.8%. E&C, high single digits, at 9.5%; the GS in low teens, excluding legacy costs. That was under the target in Q4. Brian will explain why. Again, it's a one-off that will potentially resolve itself as we go forward.

We put a lot of effort into resolving standing disputes with the US government. We're going to give you little bit more color around that. I think that we could've done a better job in explaining that more fully in the past. It seems to be quite a hot topic when we go around talking to potential investors and our current investors. We really want to give you our view as to where that stands today, and Brian will talk about that next.

Again, we continue to employ a balanced capital allocation policy. I think I've touched on all of them as part of the summary. We will continue with that policy going forward.

Now I would like to hand over to Brian, who will firstly give you a little bit of color, a little bit more meat on the bone around where we are in our dispute resolutions. Then he'll move on to the results. Brian?

Thank you, Stuart, and good morning. On slide 6, you'll see an update on some of the major disputes that we have and trying to compare where we were at the end of 2014 to the end of 2015. One of the areas that we had a fair amount of exposure going into 2015 was relating to US government audits. With a little context, for the period 2003 to 2011, that was the height of the LOGCAP 3 contract support of the US military in Iraq. We invoiced over that time period $46 billion. That's about $5.1 billion in billings per year.

Coming into the year we had three years still open, subject to audit, and we closed the year at the end of 2015 with only $9 million remaining being questioned by the government -- a tremendous accomplishment, and we expect to get that $9 million resolved this year, and hopefully within the next quarter or so. Other years still open, the 2012 through 2014, the billings dropped down to only $1.2 billion for that time period, so only $400 million. You see a significant step-down in the amount of cost to be audited by the government.

I point out that our success rate in justifying the billings that we render to the government is 99.89%. In my view, a significant de-risking by the end of 2015 to where we entered the year relating to government audits of some very high-volume activity that we have had in the past.

Also coming into the beginning of the year, we had a number of sodium dichromate cases -- two series of cases in the states of Oregon and Texas. Actually in Oregon, we had an adverse jury verdict of $81 million against us, which was on appeal.

During the year, the cases were combined and transferred to Texas, where all the cases were dismissed on the merits. One of the findings of the court was that no one was injured. Now the plaintiffs are appealing this, but again a significant de-risking from where we entered the year.

Another ruling from the court was that the contract indemnification, including in our agreement with the US military, protects us from these type of claims and costs. Again, it's not over, but a significant de-risking from where we entered the year.

Finally, the Pemex, this is an offensive claim where we've won several times in cases against Pemex. We entered the year with a case being on appeal, with $465 million being on deposit in New York by Pemex. As we exited 2015, the hearings are complete, and we continue to wait a ruling by the court. Hopefully we will hear in the near term. We are much closer to the end than the we are to the beginning on collecting the $465 million.

Turning over to slide 7, looking at the financial results for the quarter, you see the revenues of $1.08 billion is down about $337 million from the prior year, but $207 million of that relates to the fact that we now de-consolidate the Brown & Root industrial services business that Stuart mentioned earlier, and now comes through in the equity and earnings line. We also sold the building group in the second quarter. Between those two, it's $207 million.

The delta also reflects the run-down on one of the larger LNG projects in Australia that we have been talking about for some quarters now. Gross profit in equity and earnings reflects the improved performance Stuart referred to earlier, and clearly a significant change from where we work in the fourth quarter of 2014, when we went through the restructuring process.

G&A costs continue to come down. It's a $25-million reduction from a year-ago quarter. That's again the cost initiatives that we have been talking about for some time. The impairment of long-lived assets and restructuring charges continue as we re-balance our business. $17 million of those charges relate to the write-off of ERP expenses and non-cash, as cash had been spent last year -- and the cost initiatives as well relating to severance, offset partially by some gains on sales of excess office space and our Infrastructure Americas business. The net of the two is about a $9-million hit to the quarter.

Net income obviously reflects all of the above. Just one thing to point out, the discrete tax of $8 million in the quarter. This is in relation to the UK tax rate dropping from 20% to 18%; so therefore the tax benefits that we have, primarily related to the UK pension, will generate lower value in the future when we get to deduct them for tax purposes; but the good news is the tax rate on earnings will be lower, as well. All of that results in a EPS of $0.29.

Going over the page top page 8. Page 8 reflects how we think about the business. As I mentioned, the $0.29 EPS for the quarter, that's $1.40 for the full year. But there are number of these strategic initiatives that we've been doing throughout the year that are not really operational, or run-rate type items we tend to back those out.

Specifically, the non-strategic businesses -- although the performance has been better than what had been expected on the power plant portfolio that we still have, with $11 million gained during the quarter, which equates to about $0.08 and $27 million for the year, which equates to about $0.19. Clearly that's business that we're exiting, and therefore it's not going to be resulting in the future.

The impairments and restructuring charges, $36 million for the quarter, equates to about $0.22, and $70 million for the year, or $0.41. The gain on the disposition of assets, $27 million for the quarter, $0.16 per share for the quarter, and $61 million for the year, which is about $0.40 for the year.

If you recall, in the second quarter we had a gain. We had a correction of an error that was over a number of years, relating to our joint venture that we have in Mexico. That was about $0.10. Then the tax rate changed in the UK, $0.06.

You look at the adjusted EPS after backing out these -- what I consider non-operational-type activities, you're at $0.33 for the quarter, $1.18 for the year. Then we continue with the US legacy legal fees, which were $5 million for the quarter, or $0.03, and $18 million for the year or about $0.12. When we think about EPS, we think about $0.36 for the quarter and about $1.30 for the year.

Moving over to slide 9, a little bit more detail on the P&L. You're looking at it from a segment perspective. You see the technology and consulting group, the revenues are up. That's largely related to increased volumes of proprietary equipment. The E&C, we talked about the de-consolidation of the industrial services group, as well as the LNG project.

Also in there, in 2014 we had the Canadian pipe fabrication work and Canadian construction, which has -- the pipe fabrication has been transferred to a joint venture, and the construction in Canada has dropped off a little bit, reflecting tar sands or oil sands activities.

Government services is higher in revenues, and that's largely related to support for the US military abroad under the LOGCAP 4 contract. The non-strategics reflect the sale of the building group, which was $81 million in the fourth quarter of 2014, which was sold -- that business was sold, again, in the second quarter.

Gross profit and equity earnings are up across the board compared to the prior year, obviously with all the restructuring charges from the fourth quarter of 2014. But again, it reflects good performance in T&C on the proprietary equipment side, especially when we're talking about the technology component of it, not so much the consulting side.

E&C had strong performance during the quarter. The government services improved from where we were a year ago, but the margins are down a bit for the quarter. This reflects the fact that one of the project close-outs, we received some sub-contractor claims, very recently actually, after the year end but before we filed, so they are included in the fourth-quarter results. We believe there may be some merit to them, but we haven't had the opportunity to fully evaluate whether these are recoverable from our client, so we have the cost in there and zero revenues.

That's why the quarter margins are down a bit. If we are able to recover from the government, it would be only up side relating to those claims. The non-strategic business again reflects the power projects, and the EBIDTA again is reflective of all the above, plus the fact that the change from the year ago was all the goodwill impairment that we had taken.

Moving on to slide 10, we had a good cash quarter. Cash balance at the end of the year was $883 million, and that's being driven primarily from $132 million of operating cash flow during the quarter. That's the good news.

The bad news is we were successful in advancing some of that from 2016, so it's timing. The first quarter will be negatively impacted by that shift out of the first quarter and into the fourth quarter.

During the first quarter, we have already spent $24 million to acquire three subsidiaries of Chematur. This is in line with our strategic initiative to add to our technology portfolio. We're looking to add on with additional bolt-on acquisitions throughout the year.

Our balance sheet is strong. We believe that that's very important to our clients; but it also gives us optionality as things develop in some challenging markets. We intend to continue with our balanced capital allocation strategy. As Stuart mentioned, we pay a very competitive-yielding dividend of about 2.5%.

During the quarter we returned $52 million to shareholders, $40 million in repurchases and $12 million in dividends. You see for the year $109 million was returned to shareholders. Since the spin back in 2007, just under $1.1 billion have been returned to shareholders.

With that, I'll turn the call back over to Stuart, and he'll walk you through the market outlook.

Thank you, Brian. Global hydrocarbons is a tough market today. I think it will remain a tough market for E&Cs I don't think there's any getting away from that. I think prudent cost management is essential, and I think we've demonstrated good performance in that area, which needs to continue. But opportunities do remain. There's ongoing demand, particularly in the downstream refining petrochemicals arena, which really supports where we're positioned in a technology business, we're very gas-facing. It expands the opportunity for E&C pull-through from our early positioning in technology.

It's worth mentioning here two opportunities that we've called out before. The first is really around the fertilizer EPC opportunity we declared in the Midwest of the country. In the last update, I think I explained there were a number of those opportunities that we were pursuing. They're all developer-led, and we've got those still continuing at various levels of maturity. There was a declaration recently around Midwest fertilizers, and I think because we had talked about a fertilizer plant in the Midwest, everyone thought that was the only one we were considering, and that is not the case.

In terms of Tangguh, the Tangguh pricing is in. The two competitors submitted bids, and we bid it as aggressively as we feel is sensible. As I've reiterated many times, we're not going to do anything stupid in this market, particularly in lump-sum bidding. We await the final results of that tender, which we expect very soon.

We continue to see isolated opportunities in upstream oil and gas. I think those will continue through 2016 and into 2017. The key there is to be chasing the ones that will go ahead.

Lower CapEx around the world should result in greater opportunities as people concentrate on their existing assets for our maintenance and turn-around business. I think where we're positioning our Brown & Root industrial services model gives us a really good opportunity to replicate that model -- expand it in the US, but also replicate it across the world. As Brian mentioned, we're very keen on continuing to expand our technology portfolio.

In the government services side of the business, very, very different picture. The markets across the globe are expanding for us. We see an increase in US military overseas support for obvious reasons, with our significant strategic opportunities in the UK and across Europe.

There's been a declared 2% of GDP spend in the UK and Australia, which is seeing an increase in the spending in that market, where we're well-positioned. We see increasing opportunities to support in the Middle East as things progress there.

In summary, in 2016 and beyond, we see opportunities for stronger technology, sales and growth in that business, and annuity revenue streams across KBR providing more continuity and cyclical protection. That's certainly the case in 2016, and we see that continuing.

Our balance sheet, as Brian said, was a very strong cash performance. Our balance sheet is strong. It provides significant optionality, and allows us to move quickly as strategic opportunities arise. I'm sure there will be a number of those that come to the floor during these difficult times through 2016 and into 2017.

To try and set out our scorecard and our stall for 2016, if you move to the next slide, slide 13. The first bullet, we've set out the margin objectives and we are standing by them. We will progress through each quarter as we go along against those margin objectives. We stick by our $200-million cost-reduction target that we established in December 2014, and will continue down that path through 2016 and hopefully more into 2017.

We do want to expand our Brown & Root industrial service model in the US, but actually globally as well, as we see good opportunity in the asset services side of the business. I've talked -- we've talked for many quarters about broadening our technology portfolio, which we've started to do, because it's a good business and it's doing right in the margins that are attractive, but it does position us early for opportunities in EPC pull-through.

We wish to expand our government services offerings, particularly around areas where it differentiates us going forward. As I said, the markets in that particular business are growing today. We will continue with our balance capital allocation strategy.

Moving on to slide 14, 2016 guidance. Our guidance is an EPS range of $1.20 to $1.45 excluding legacy legal fees, estimated in 2016 at $50 million, or $0.11 EPS. It's worth noting also that approximately 80% of revenue supporting this guidance is already in backlog.

To try and get out ahead a little bit of I'm sure some questions around 2017, I thought it might be worth just making a few statements around that before we open the floor to the questions. First and foremost, we are very conscious that whatever we say we really want to stand behind. Right up front, we are not going to give formal guidance for 2017.

However, in 2016 growth in our technology and our government services businesses has helped counteract the head winds in our E&C business, and we see this continuing into 2017 and beyond. Our strategic intent as we set out supports this.

In the hydrocarbon sector, as you're all well aware, our customers are limiting capital expenditure, and 2017 is heading to be a tougher year than 2016. That said, our scale and our position opposite gas monetization, particularly in downstream and petrochemicals, and our technology positioning, really helps us.

Our balance sheet gives us great optionality. We are looking acquisitively, as you are aware. We think there are, and there will continue to be opportunities that align with our strategy going forward, really around expanding the technology portfolio, and thus giving great opportunity for EPC pull-through where it makes sense, globalizing the Brown & Root industrial services model around maintenance and turn-around, and really growing our government services offering around differentiation.

Finally, the other lever you can pull in a market like this is of course the cost lever. I think we've demonstrated since the beginning of 2015 through the course of the year and with our targets of $200-million cost reduction that we're performing well in this area. We believe there's more to go.

We can continue to get more efficient, and this will continue in 2016 and into 2017. This really helps us competitively, but also helps us achieve declared target margins.

With that, I will hand over to Zac.

Operator, at this time we would like to open the floor for questions.

(Operator Instructions)

Tahira Afzal.

Hi, folks. Congratulations on a good quarter.

Thank you, good morning.

First of all, thank you for setting some qualitative expectations for 2017, which seem pretty grounded. I assume at these levels it'll help your stock. If I was to look at the government side of the business, could you give us more of an idea of some of the backlog opportunities you have left over there. There's still some large ones on the UK side. Number two, the US side, obviously we are seeing an up-tick in some of the spending, at least for this year. Are you seeing anything of the same size and scope as the opportunities in the UK?

We're not clear of the opportunities in the UK you're referring to, Tahira?

You cut out a bit. I'm sorry, we didn't hear the beginning of your question.

Oh yes, sorry. I know you have just won a large UK opportunity, but I'm wondering if there are some other lumpy large ones out there that you can highlight a little more, and whether there are any similar ones now in the US with the spending here potentially picking up?

This is in the government services side of the business?

That's correct.

Yes. I think we've talked before about Army 2020, which is really the UK government bringing the rest of the UK Army back to the UK mainland from Germany. That continues to progress well. We're in single-source negotiations with the Ministry of Defense to achieve that goal. As you know, we built the facilities in the Salisbury Plain for the UK Army, and we maintain them for the next 20-odd years. This will be an additive, reasonably-sized construction portion to this. Then the maintenance portion will increase opposite our current contract. A really sizable opportunity for us, and one that we will drive to conclusion through the course of 2016 -- probably mid-year, late Q2, maybe into Q3, depending on if we can get all the contract terms sorted out with the government. That's progressing very well, and that's a sizable opportunity.

In terms of the US side of the business, we are tendering a number of sizable base contracts today. The timing of award is -- will happen, we believe through 2016, but it is difficult to determine the exact timing just because it's a government process. We haven't really called out those as specific opportunities because there's a number of them. If we get our fair share, I think we'll see some good growth in that side of the business.

Got it, okay. Stuart, in regards to your qualitative commentary around 2017, being a tougher year, and how that plays out for you, would that be partly dependent on obviously Magnolia going ahead and being awarded for construction by the early part of next year? Is Tangguh just as important? Is it a less-tough year if you end up getting at least one or both of those?

I think both are very different scales. I would say that for a start. I think Tangguh is far smaller in scale than Magnolia. I think that for us neither of those opportunities are in backlog today. None of them -- we would not do that until they reach financial close. It's worth calling that out. That's really our policy and we'll stick by it. It would be terrific if Magnolia -- the client is confident that they're at the right end of the cost curve. They're still in a dollars per ton perspective at the very lower end of that. They feel that as they progress through 2016 the opportunity for LNG sales, they believe will be good.

In terms of looking into 2017, I don't think either of those opportunities for us are -- we don't need either of them to actually deliver on our strategy of where we're heading. Obviously if one or both were successful, that would make life a little bit easier, of course it would. I don't think them going ahead or not going ahead of being successful will detract from where we're heading.

Thank you very much, Stuart.

Rob Norfleet.

Good morning, and congratulations on a nice end to the year.

Thanks, Rob.

Just a quick question. We always get into the question of guidance within guidance, but when I look at the range of the guidance, and Brian, I think you did a nice job of pointing out what some of the non-operational items were that impacted results in 2015, so we could look at it on an apples-to-apples basis, there is a fairly wide gap at the bottom end of $1.20, which would imply on an adjusted basis modestly down earnings.

I know you guys have pointed out obviously some of the difficulties in the market. Could you maybe point out, just in terms of the low end versus high end, what from a bottoms-up perspective you guys -- what would have to happen for the lower end versus the bottom end to happen? Is it more that a project like Magnolia does not come to FID, or is it just more CapEx cuts and the inability to win some of the larger projects that we've discussed? I'm trying to get a general understanding of the range.

Rob, again, if you look at the range, we don't think it's so far off to where we are for this year. If anything, maybe it's -- we have a good opportunity for it to be up slightly in a pretty challenging market, but it's a challenging market. We will see how things play out, but to answer your specific question about Magnolia, Magnolia is unlikely to proceed. The last we had heard from the client publicly was delayed until the end of the year, so it would have no impact on this year.

Within that contract, given that you have a -- obviously you've guaranteed a fixed price EPC contract. Would you likely extend that, or how do you work with a customer in that regard?

You're right, we would look to extend out as we -- within the realms of reasonableness -- as the year progresses.

Okay. My second question involves around obviously we have two of the larger LNG projects that are pretty heavy contributors to the E&C segment this year. Can you talk about the contribution this year, and really the roll-down of those contracts as we enter the second half of 2016, and what if any contribution there will be in 2017?

I think we've been pretty clear about the fact that our LNG earnings in 2016 will be similar to 2015. I think we will continue with that. The two projects are at different stages of their cycle, with Gorgon looking to produce hydrocarbon very soon and first LNG there. That project will run down through the course of the year while the Ichthys project will continue, and running through the construction cycle in 2016 on into 2017.

Okay, great. Lastly, in terms of -- Brian, can you give us in terms of cash, the amount of cash that's US versus international, and again how that potentially impacts capital-allocation decisions in 2016?

We have what, about $300 million? It's in the 10-K. There's a chart. Let me see if I can find it quickly. In terms of capital allocation, there is about $336 million, I'm told domestically -- oh, page 36, I'm told. It's about $300 million or so -- $360 million

In terms of capital allocation, no, it doesn't have a significant impact where the cash is located. We are looking at opportunities on the M&A side on a global basis. Clearly on the buy-backs and dividends that's more of a domestic cash issue. But we have some fair flexibility about how we can move cash around in a tax-efficient manner right now. The split between the two is not a huge issue in terms of capital allocation.

Great. Thanks for the time, and congratulations again on a good year in a difficult environment.

Thank you very much.

Jamie Cook.

Hi, good morning. Can you hear me?

Yes. Good morning, Jamie.

Good morning, everyone. A couple questions, Brian, if I could just press you a little more on how to think about 2016 and 2017. One, is there anything unusual -- or how do we think about the cadence of earnings in 2016 first half versus second half? Because obviously that has implications for how we think about 2017, and just with the roll-off on the LNG projects. Brian, your stock is trading like your E&C earnings in 2017 are going to get cut by 60% or 70%. Any color you can give? If Magnolia is not going to contribute this year -- or contribute in 2016. If we don't get Tangguh, how bad could E&C be?

The other -- my other question, I guess, would be back on the cash flow side. While the market is very negative on your earnings outlook beyond 2017, I still feel like on the cash side people under-appreciate the opportunities for you to produce cash flow above your net income levels. Can you talk about, as we think about over the next 12 to 8 months, are there any one-time things that could significantly improve your free cash flow above net income, and how you think about share repo versus deals, given the free cash flow pipeline? Thanks.

Okay, in terms of earnings --

I haven't even had coffee, Brian.

I thought you said you were going to ask a couple questions there. Well. (laughter)

18-part question.

Well, if I -- what I can remember out of all of those questions in terms of the earnings profile, we do think there might be a little bit of a dip in the first quarter, but the ramp up more toward the middle of the year. In terms of the cash flow, as I already indicated, again we think the first quarter will be a little bit light, given that we've accelerated some of that cash, about $50 million or so from Q1 into the last quarter of 2015 Plus we spent $24 million on the acquisition of the Chematur subsidiaries. We've also on the fixed-wing aircraft, there was about a $10-million capital contribution required for that project. The cash will be a little bit light in the first quarter. But again, it should ramp up throughout the year.

In terms of the ability to generate cash as a Company, the drag that we have remains the power projects. As you recall, those projects or the project -- the one remaining project -- we had taken charges on. That project will not be over until the early part of 2017. That's going to continue to dampen, if you would, the cash until that project is completed. We are focused on cash generation. You saw had a very good fourth quarter. It remains a priority here.

The US -- is there something that could really move the needle? Certainly the Pemex award. If we were to win that, the only option left to Pemex would be to appeal to the US Supreme Court. That may delay collections. The outside counsel advised us that they don't believe it's highly likely the US Supreme Court would hear a commercial dispute like that. The cash is already on deposit in New York, so it's not like we have to go collect from the client. It is already there. That certainly is a game changer, if that were to occur.

What about anything with the government advance pre-payments? You didn't answer how you think about cash in terms of anything other than the small sort of technology deals? You didn't answer the question on how bad it could be in 2017 if you don't get Tangguh or Magnolia. Does this get cut in half? I'm just trying to think of the worst case scenario?

As Stuart mentioned on Tangguh and Magnolia, Magnolia -- if the project goes at year end, which is what the client most recently indicated, its impact on 2017 earnings would be relatively modest. You're doing the engineering components, which don't generate a large percent complete. That's not a significant driver for 2017.

Let's assume neither of those happen.

I'm sorry?

I'm trying to understand how E&C looks in 2017 if Tangguh and Magnolia don't happen?

It's an interesting question, Jamie. One of our observations in 2015 was the level of large jobs coming through the EPC cycle that we've announced is actually quite modest. The business continues to win a lot of work in the smaller-project -- you would call them smaller-project or medium-project-type scale. Those projects will continue. I think we've done very well in that area going forward. It's not a case of one or two projects and E&C is in trouble. I think the business resilience around E&C is far stronger than just one or two projects.

We'll move forward to our next question from Andrew Kaplowitz.

Good morning, guys.

Hi, Andy.

Nice quarter. How are you doing? Stuart, maybe you can talk a little bit more about the progress of restructuring that you've made. We noticed -- I think you changed your wording in the press release from guidance of $200 million to at least $200 million this quarter? How do we think about additional opportunities for KBR to take out costs, and when and where can you do it? Following on to that also, how do we think about the lower costs falling to the bottom line, given pricing pressures out in the E&C environment right now?

What we found through the cost-reduction exercise is that you always attack the lower-hanging fruit first. I think as I've explained often on the road, the beauty of what has happened I think within KBR is a passion from the people. We're getting a lot of the ideas in the feedback up through the business rather than from the top down. The ability for those cost savings to stick is far greater. As a consequence of that, we're actually seeing greater opportunity to take cost -- continual cost out of the business as we go forward.

Second, the stall-out of $200 million in 2016 is really the target. We do think there may well be opportunities beyond that, but I think anyone who understands our business understands one of the things in a down market that you have to actually manage is your LCA, or your non-chargeable time. We have been very transparent that a dollar of cost out of the business is a true dollar of cost. It's not we take a dollar out here and something happens over there, and it goes up, but that's not -- we don't count it. We count everything.

We need to manage our non-chargeable time, and maintain capability through this period. I think that setting our stall-out the way we've done it is appropriate, but I do think there are opportunities for even more efficiency through the business. That's why we've actually made the statement at least $200 million.

Okay, that's helpful. Then you guys have talked about a lot of potential growth in Government Services. I think you know this. You did about $60 million in profits, excluding legal fees, in the year in 2015. If you look at KBR historically outside of LOGCAP, It's been difficult for KBR to grow Government Services. It does seem like you have more opportunity than you've had in the past.

Maybe, Stuart, you can talk about how do we think about absolute growth in this business going forward, because I do think it's key to offsetting some of the hydrocarbon stuff, but it's been a struggle to grow the business ex-LOGCAP in the past?

It's difficult to talk for the past, because I wasn't really here. I would say it was -- you would think running a contract like LOGCAP 3 was pretty all-consuming. That aside, we are now in a very different phase of development in Government Services. We know strategically where we want to go. We really understand the markets we are in. We know the competitive landscape and we know our positioning. We know exactly where we want to invest, and how we want to differentiate -- or the areas we want to move into to differentiate that business.

I think there's significant opportunities to grow it organically. I think there are some opportunities to grow acquisitively. I think as we move through the course of 2016, I think you will start to see that. In addition, I think the strategic opportunities that we are pursuing in the UK, and in the US for that matter -- but I guess near-term in the UK -- are starting to come through. These are really solid long-term annuity type opportunities that will really set us -- our earnings platform in a very consistent manner going forward.

Steven Fisher.

Thank you, good morning.

Good morning. I want to come back to the 2016 guidance again, if you could just give us a little more color on what you assume in there, to follow up on Rob's question before. I know, Brian, you listed the things that you don't really count for 2015. What are some of those things that you may or may not have in 2016? It sounds like, what he told Rob was, the change orders you feel very good about but what about some of these other things that you may or not have in there for 2016.

We don't have -- this is a similar sorts of items that you see on slide 8, baked into the guidance. Asset impairments or severance costs and things like that, if that's your question.

It's more along the lines of non-strategic recoveries on the power projects, maybe there could be some more things that are additive there?

Oh, okay. Clearly we're hopeful that we can improve on the power project performance. But we have not assumed that in the guidance. You look at the -- slide 8, and those are the type items that, should they occur, we back them out when we're looking at the underlying business.

Okay. And then again, just to follow up on Jamie's question again, to harp on 2017 a little bit, it sounds like your message is that you have enough small- to mid-size type projects to really keep 2017 from falling off a cliff, which is really what the investor concern is. Is that the message, that it's the small- and medium-sized stuff -- that itself can do it, or you still need some of these other technology and downstream and chemical projects elsewhere?

I think it's across it, Steven. I think part of it is the message around the smaller projects and not all-consuming large projects will make us fall off the cliff. As I said before, we think there's an element of counter-cyclicality around our growth in technology and our opportunity in government services combined with our optionality around the balance sheet.

And the cost reduction.

And of course the cost reduction. We've said all along that we are very focused on growing the bottom line.

Jerry Revich.

Good morning, everyone.

Hello, Jerry.

Stuart, I wonder if you could just flesh out for us, your broad range of expectations for orders in 2016? Or prospects, however you can frame it, and maybe give us the major buckets within that -- what proportion of your orders do expect to be driven by these midsize projects? And you spoke about refining opportunities? Maybe flesh that out for us as well, in terms of whether that is brownfield or greenfield, and any additional color would be helpful.

I don't think we have, Jerry, in the past and I don't think it's probably right that we give specific sector data like that. We do think there's growth opportunities in the technology side. We do think -- we've called out one or two opportunities in the government services side that have been there through 2015, that we continue to report on into 2016. I think that is pretty clear. I think the key on the government services side is to look at the growth, the demand growth, the market growth and where KBR sits in that environment. That's probably easier.

In terms of the color around the E&C and specific opportunities, I think again, if you went back and looked at our announcements through 2015 and the larger projects, and look at our performance through the year, it I will give you sort of flavor. I don't have the exact percentage, and I don't want to quote one that is wrong. But I think if you went back and looked at that, it will give you a good flavor of what we've just stated.

I think in the downstream sector and the petrochemical sector, I think the opportunities through the lower gas prices in the US will continue. The chemical companies continue to look at expansion opportunities because of the lower gas price. There are certainly opportunities that we're seeing right now in the Middle East that we continue to look to, and practically integrate and in their economies. I think you will continue to see that through the course of 2016 and into 2017.

And I think because, as we said very often, our -- where we are, we are a gas-facing company, our technology is all gas facing. And really, the projects that we do, that are sizable, are typically in the gas arena. We've got some in the oil arena offshore, but typically onshore it is gas. I think that plays well to the market opportunities that will exist going forward.

Stuart, you have won an outstanding share of nitrogen projects, and now that that CapEx cycle looks to be slowing, based on urea prices, can you talk about how active you are in US ethylene bids? How big of a focus area is that for you at this point?

I think the next wave of ethylene projects that people talk about, I think we are actively engaged in looking at that right now. It's a focus area for us. I think we did some work in the last round of ethylene projects, but I think people have pointed out that we probably didn't do as much as people expected and that is probably fair.

Again, for us, that gives us a great opportunity to get refocused and work hard. We've got a very solid technology that we can apply to that market, that has some real advantages. We've just got to play on that.

Bill Newby.

Good morning guys, Bill Newby on for John Rogers.

Good morning.

Was hoping to get some more color around the acquisition pipeline that you guys see in the near-term. I think you mentioned some bolt-on acquisitions that you're seeing here in 2016, but any more color there would be great.

I think we have said all along that acquisitively, we would only do it if there was synergy on the revenue side. We wouldn't do something purely for a cost-synergistic benefit. We want one plus one is greater than two.

And we've called out, I think, in our 2016 scorecard, that the three areas that excite us at the moment, the first is, again, broadening the technology portfolio. A, because it's a great business in its own right, we'll have a bit of a -- do that with recurring revenue around solvent sales or a [cut in] sales, that's terrific. But also position us for the EPC opportunities going forward, of which we can be a little bit more selective, and get in early, and be a little bit more differentiated, which, in this marketplace will really help.

In terms of the other area we are keen on, it's broadening the Brown & Root industrial services model in the US and globally. We do think that there will be a lot more work in this area, as people try to get more out of existing assets. With a lack of CapEx, I think the last downcycle demonstrated that was actually the case. And the third, but certainly not the least, is the government services business with an increasing demand. The opportunity for us to broaden our service offering there, and get into areas of differentiation is in front of us.

We've tried to be pretty clear about our strategic priorities for 2016. We will only do acquisitions if it fits our strategy. And we will only do it if it's synergistic on a revenue basis.

Thanks. I appreciate it.

Vishal Shah.

Hello, this is (inaudible) in for Vishal. Thank you for taking my question. With the increased focus on bidding around maintenance and around work, can you talk about the pricing levels that you are seeing and the competition that is present in the segment?

I think it's worth saying that the contracts that you enter into, and particularly in the maintenance side of the business, are typically long-term. The margin guidance we have given within E&C, we stick by. Typically, once you get the invoicing and the administration sorted out, the cash performance is typically good.

I think all of that plays to being an attractive business. Certainly, the risk profile, they tend to be far more cost-reimbursable than lump sum, also. Which helps cyclicality of performance.

That's helpful. Thank you.

I think we're done.

That concludes today's question and answer session. I would now like to turn the conference over to Stuart Bradie for any additional or closing remarks.

As ever, thank you very much for taking the time to listen this morning. We've tried to give a little bit more flavor and color around how we've progressed through the year in resolving some of the legacy disputes. I think the team has done a fantastic job, really de-risking the business from where it was 12 to 18 months ago.

It's difficult times in the hydrocarbons market, and less so in the government services side of the business. I think there's a good balance to what we're looking at in front of us. And certainly, I'm very proud of the performance we've done, not only in safety but also cash management through the course of the year. Which gives us a great optionality. Thank you again for listening, and obviously, happy to take any follow-up calls or questions through the course of the next little while, and the year for that matter. Thank you.

That concludes today's conference call. We thank you for your participation.