KBR Inc (KBR) 2017 Q4 法說會逐字稿

Good day, and welcome to KBR's Fourth Quarter 2017 Earnings Conference Call. This call is being recorded. (Operator Instructions)

For opening remarks and introductions, I'd now like to turn the call over to Nelson Rowe. Please go ahead, sir.

Good morning, and thank you for joining us today to discuss KBR's fourth quarter and fiscal year 2017 financial results. Joining us on today's call will be Stuart Bradie, President and Chief Executive Officer of KBR; and Mark Sopp, Executive Vice President and Chief Financial Officer.

Stuart and Mark will discuss KBR's financial and operational results, market outlook and earnings expectations for 2018. Please refer to the presentation that is posted on our website in the Investors section of kbr.com. Following their prepared remarks, we will take your questions.

Today's call is also being webcast and a replay will be available on KBR's website for 7 days at kbr.com. The press release announcing KBR's fourth quarter and fiscal year 2017 results and the 2017 Form 10-K will also be available on the website.

Before we turn the call over to Stuart, I would like to remind the audience that today's discussion 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 and fiscal year 2017 earnings press release, 2017 Form 10-K for the period ended December 31, 2017, and current reports on Form 8-K. You can find all these documents on the website at kbr.com.

Now I will turn the call over to Stuart.

Thanks, Nelson, and thank you for joining us this morning and in your interest in KBR. We have much to talk about today in what has been a busy, but very exciting close to 2017 and one, which I believe, sets us up well for 2018 and beyond. With a number of moving parts this quarter, we will detail these out in a second, but the key pieces are as follows:

Q4 underlying operational performance and our full year performance were in line with or above consensus. We met or exceeded guidance in every quarter this year. Our full year operating cash flow performance was at the top of our range with a strong showing in Q4.

Our legacy Ichthys project is close to completing the first train with the second train due for completion mid-year. To be clear, our main issues on Ichthys are not in execution. We had a joint and several liability consortium of CH2, UGL and GE, who abandoned their contract for the power station. We have stepped in to complete these works and expect to recover our cost from the consortium.

We have now completed the in-depth cost review of the associated power station. The additional cost to complete drove the dilution impact in Q4, most of which will be recovered in 2018. We have also addressed the liquidity risk associated with closing this out, more on this later.

I'm also pleased to announce we have signed a definitive agreement to acquire SGT, a unique asset providing high-end technology solutions to NASA, NOAA, et cetera, including mission-critical IT solutions. This acquisition further expands our footprint in the U.S. government area, positions us, arguably, as the preeminent services provider to NASA and strengthens our mission-critical IT solutions offering. Accretive from year 1 and bang on strategy and this also comes at a time when there are strong market fundamentals.

In the U.K., due to Carillion's liquidation in early January, we have assumed operational responsibility for the Aspire joint venture, and we are in advanced negotiations to acquire Carillion's assets in the Aspire joint venture. Going forward, KBR will recognize 100% of the benefit of the ongoing and ramping up capital works program and the existing and ongoing maintenance portfolio, which lasts another 23 years. This is a high-performing program and one we, of course, know intimately.

Today, we are also announcing a restructure to our balance sheet, which allows us to do all the things above, have a clean revolver and adequate LC capacity. And it facilitates funding Ichthys in a way we can close this out, while moving new KBR forward.

Book-to-bill in Q4 was 1.2, with Government Services delivering 1.3 and technology at 2.6 in the quarter. Going into 2018, we have significant pro forma backlog, especially with the addition of SGT and Aspire and again, more on this later.

Our earnings ratios from the segments in 2018 is expected to be very different with an attractive risk profile and cash conversion opportunity. Again, more on this later.

The outlook in all our key markets is positive and our consistent performance in '17 has forced a revaluation of our tax credits. And this combined with the new tax rules has resulted in a sizable noncash gain in the quarter. More detail on this and our underlying performance later.

With all that said, the key metric is guidance. And I'm pleased to report that, even taking our increased performance in 2017 as the new base, we expect to deliver the growth target across the company as presented in our Investor Day back in May '17.

A couple of points on that, our belief in May that new KBR had a business mix and risk profile that allowed us to better predict our performance has held true. And secondly, our firm commitment to commercial and strategic discipline and our evolving high-performance culture continues to deliver better results as we saw in 2017.

On to Slide 4, safety. An excellent year for KBR, and our people as the graph shows. Since we launched Zero Harm, we have seen over 50% reduction in incident rates. Note, this includes the acquisitions and the associated integration and alignment. I'd like to thank all at KBR for making this happen, it is a true team effort.

On to Slide 5. So some highlights from 2017 starting on the top left. Revenue was up a little year-on-year, excluding Non-Strategic Business revenue. In short, we've stabilized our revenue with increases in Government Services offsetting the decrease in E&C, while reducing risk.

On EBITDA, margins were above expectations with all 3 segments individually doing very well. This resulted in strong EPS performance but, as I said in my opening remarks, the key is consistency, achieving or beating consensus and guidance in each quarter in 2017.

Operating cash flow of $193 million was at the top end of our guidance. Backlog performance in the latter half of the year was pleasing with Q4 at 1.2. And across the year, Government Services book-to-bill was 1.2 and Technology & Consulting at 1.3, underpinning the growth in these businesses.

In E&C, market activity is definitely improving and, as previously reported, we expect to see movement in Q1 and onwards.

We continued to resolve legacy issues throughout the year, further increasing certainty of performance, the notables being PEMEX and Burn Pit.

On to Slide 6. We'll give a bit more color on our markets later, but to set the scene, it's worth saying we're all very excited and upbeat about KBR's positioning going into 2018. There are tailwinds in all 3 of our segment markets, recent policy, government spending and budget agreements in the U.S.A. are really positive for our government business.

The Trump administration's policy on the U.S. regaining leadership in space is exciting for existing and future space business, as is the public-private partnership opportunities in the growing commercial space arena. The technology market is buoyant, record bookings in Q4 are expected to continue into 2018.

In LNG, activity is increasing with increased demand from China and India for environmental reasons, shale gas monetization in the U.S. continues to see good activity levels and oil price stability is also helping. E&C backlog growth is expected through '18.

This is an excellent time to strengthen our position in our key markets, and we have great confidence on strategic expansion by adding both Aspire and SGT.

More on this later, but I'll now hand over to Mark.

Great. Thank you, Stuart. I'll continue on Slide 8 of the presentation. First, I'll cover a few highlights and takeaways from Q4 and also the full fiscal year. While there were a number of puts and takes to the fourth quarter, core performance, as Stuart said, was as expected and took us to the top of our expectations for the year that we laid out last quarter.

We saw 6% organic top line growth quarter-over-quarter in both our Government Services and Technology & Consulting businesses, GS and T&C, driven by improving market fundamentals, coupled with a good positioning for scope increases on existing work and in landing new work. At the same time and as expected, E&C continued to contract as we near completion on several projects and without significant new contract offsets.

Gross profit, equity in earnings and operating income were generally as planned with all metrics improving significantly from last year as we saw much more stable earnings across all 3 segments.

As Stuart mentioned earlier, we had a superb fourth quarter for the T&C business, including operating margins that exceeded 30% and the building of a strong backlog for 2018.

You can see the large tax benefit in the quarter that Stuart mentioned earlier. This was driven by 2 different sources. By far, the largest was releasing over $200 million of tax valuation reserves, tied to KBR's improved and more predictable profit performance and outlook, particularly in the U.S. More on these tax items in a moment. We've backed out those nonrecurring gains for adjusted EPS purposes, still finishing on the top end of our most recent guidance, which had also been raised during the year. Operating cash flow also finished strong at almost $200 million for 2017.

Moving on to Slide 9. An important goal of ours and the driver for 2017's performance was attaining targeted profit margins set out in the last May's investor conference. We're pleased to report these targets were achieved by all of our segments, and they consistently did so during the year with improved contract mix, higher proportions of services-based revenues and improved project execution. These targets remain in place for 2018.

Slide 10. Following up on tax items. The valuation allowance reduction was $223 million, all related to coming out of the 3-year cumulative loss period in the United States, coupled with a confident forecast for long-term profitability going forward. Our recent strategic efforts to balance out our portfolio with more government services and more services across the Hydrocarbon sector clearly were enablers for this.

The $18 million tax benefit relates to favorable consequences from the new tax reform legislation recently enacted, that resulted in reevaluating our deferred tax liabilities to the new lower federal rate. Importantly, we avoided about $60 million in cash effects from the new repatriation tax. We avoided that by utilizing unused foreign tax credits to offset that potential tax.

Slide 11. Here's a quick summary of how our cash, debt and key credit statistics changed over the year. Cash generation enabled us to reduce our debt by $180 million to $470 million, and reduce our gross debt to leverage ratio to well below 2. We also bought back $50 million of stock during the year, and maintained our regular dividend. We have been meaning to refinance for some time and are now in advance actions to do this in the coming months, more on this after one more topic.

Slide 12. Here's a more thorough update on the Ichthys LNG project, building on Stuart's earlier remarks, where our involvement in the program is a 30% stake in the JKC joint venture, which is the prime contractor on the $20 billion-plus on-shore component of the LNG project.

First, let me point out there's a comprehensive and updated disclosure on this project included in our Form 10-K. Please check that out. There are a couple of main points to emphasize. The project has 3 components, looking at the left side of this slide, 3 components, the re-measurable part is complete, the cost reimbursable part will be completed in the second half of this year and the fixed price component has 2 parts. One fixed-price component is complete and the other, the power plant, is projected to be completed in the first half of 2019. The fixed price power plant component was originally passed through to subcontractors also on a fixed-price basis.

As further discussed in our 10-K, our original subcontractors on the fixed-price power plant portion abandoned the project in 2017 at which time, they claimed to be in advanced stages of their progress. As was more deeply discovered over the past few months, there were significant shortcomings in the engineering designs, material procurements, construction workmanship and the actual stage of completion by the original subcontractors.

As the discovery of these shortcomings were revealed, we engaged and completed a comprehensive cost estimate of the re-engineering procurements, reworks and construction completion efforts needed in light of these circumstances. This included third parties to validate our findings, including the rigorous documentation we have assembled to demonstrate these shortcomings and our entitlements to recoveries against those subcontractors for later use in litigation. Resulting cost estimate completed in Q4 was significantly higher than the previous estimate.

Our joint venture has hired and funded new subcontractors and employees to complete the plant to meet our contract obligations. Our portion of the funding requirement is expected to be in the $300 million to $400 million range through the estimated completion next year, and will be in the form of loans to the joint venture. We plan to fund this via a dedicated borrowing facility within our recapitalization plan, which I'll cover in just a moment.

We expect to receive [coveries] plus additional damages from of the original subcontractors through litigation or otherwise to repay these loans. We're also pursuing funds from the clients on other matters that we believe we are entitled to, both of which will be used to settle the dedicated financing.

In terms of the financials, the loans will be reported as cash used in investing activities and the expected recoveries will be presented as cash flows provided from investing activities as they occur. While we are pursuing recoveries right away, it is more reasonable to expect them to start in 2019 and quite possibly, beyond.

Slide 13. We are now moving forward with long-term financing to extend the tenor of our borrowing capacity and to finance the SGT acquisition and the Ichthys requirements. We have secured a financing commitment of roughly $2 billion from a major financial institution and expect to execute the financing components in the first half of this year. Components include standard debt elements such as an unfunded revolver, a letter of credit facility, a term loan and a dedicated line for Ichthys, as just discussed. We will consider, but are not required, to use a modest amount of equity as one of those potential components.

If we proceed with an equity component, think of sizing in the 10% ZIP Code relative to our current equity market cap. Proceeding with an equity component will depend on several factors to balance stakeholder interests as we get through the transaction. And finally, the estimated debt rates and relevant costs for this recapitalization have been incorporated into our 2018 guidance.

On the topic of guidance, moving on to Slide 14, our initial guidance for 2018 is $1.35 to $1.45 earnings per share on an adjusted basis, the midpoint of which is 7% above the same basis results for 2017 excluding the PEMEX gain. At last year's investor conference, we had advised to remove the PEMEX gain from the 2017 performance to normalize results for the year. There's a table in the appendix of this presentation to show those figures.

7% earnings growth is also consistent with the growth target for 2018 that we set forth in last May's investor conference as Stuart earlier mentioned. It is notable the projected new interest costs we expect to incur in 2018 to fund the Ichthys loans represent a 4% headwind to the year-over-year EPS growth numbers. So we are effectively growing 11% elsewhere to achieve the 7% midpoint. I'll add, we are pursuing interest costs in our recoveries against the original subcontractors in our claims.

Operating cash flow in 2018 is expected to be $125 million to $175 million. This is depressed by roughly $30 million for outflows, which had been otherwise planned in 2017, which slipped into 2018.

Now I'll turn it back over to Stuart for more discussion on the outlook of the business and more on recent developments.

Thanks, Mark. 2018 outlook. I'll give you the rationale and some details that underpins our growth and guidance. So on to Slide 16. Strong growth is expected in Government Services, U.S. Defense spending is strong and in areas that should benefit KBRwyle from engineering to sustainment and an increased base and OCO funding.

A clear emphasis on space leadership with manned flights returning to the moon and on to Mars, the reestablished Space Council chaired by the Vice President is focused on ensuring key capabilities and learnings that are utilized from NASA into military space and vice versa and commercial space is also an evolving opportunity. We envisage our future space franchise with the addition of SGT having a NASA arm, a military space arm and a commercial space arm, exciting times.

Leveraging our increasing high-end capability is providing expanded opportunities in the consulting area with the U.K. Military and the Australian Ministry of Defense. Now growing mainly cost reimbursable backlog allows us to focus on new business capture and synergy realization, and this is a critical in a growing market. Margin expectation in 2018 remains high single and to low double digits.

On to Slide 17. For technology, it's almost a perfect storm for our suite of technologies. This was demonstrated with our Q4 book-to-bill of 2.6, an outstanding margin performance. Gas Monetization technologies, including ammonia, ethylene, et cetera, are in high demand as are the associated downstream technologies. Demand is global with both low feedstock price and consumer demand at play.

At the same time, our refining technologies, especially bottom of the barrel technologies, are in high demand due to things like maritime fuel specification changes. Our consulting business is also seeing the benefit of increased activity and higher oil prices. We expect continued growth with margins holding in the low-20s.

On to Slide 18, E&C. There is certainly increased activity. Downstream market fundamentals are positive and, as previously advised, we see awards happening in Q1, going forward. In LNG, demand in China and India exceeded expectation, and recent offtake announcements have been viewed as positive market indicators. Supply-demand curves are crossing in 4 or 5 years, which of course, means FIDs need to start in '18 into '19. We are involved in Shell's Canada LNG project, Woodfibre, Magnolia, plus a number of developer-led projects.

Our Industrial Services maintenance business grew nicely in 2017, and we expect this to continue into '18, both in the U.S. and internationally. KBR's increased base business in services allows us to retain capability, while being very selective on EPC project risk. Our disciplined approach will not waiver. Key takeaway is margin performance as mid- to high single digits with backlog expected to grow through 2018.

On to Slide 19 and a bit of detail on the latest addition to KBRwyle, SGT. SGT is a great company with amazing people. It provides high-end technology solutions, engineering, mission services and mission-critical IT solutions to a number of government agencies. It's incredibly innovative and customer focused, with just over 2,500 employees today and growing.

Some key highlights. No major recompetes for 2 years. 90% cost plus and SGT comes with a number of key contract vehicles that are an additive to KBRwyle, and that we can leverage with our existing customer base.

CMMI Level 5 is the highest level of certification of software development. Only a few -- less than a handful of service companies have this. It's a clear differentiator and clear recognition of the standing of SGT.

Significant platforms and programs are shown on the right. SGT has a prominent and very well-regarded NASA franchise, and their capabilities align nicely with the Trump's administration policy goals, exciting times.

To Slide 20, transaction rationale. As I said, this is a very well run, clean and highly regarded business. There are no overlaps with KBRwyle, this is all about fit and revenue synergy. Great backlog and a robust pipeline with low integration risk. In the grid on the right, the key takeaway is that this is right on strategy, on capability, customers and market.

On to Slide 21, some high-level metrics. So the key financial metrics, annualized revenues circa $500 million and growing, margins are in line with Government Services norms, and then the free cash flow associated with this business is very strong, as you would expect. Backlog sits with options at close to $3.5 billion, so very attractive, and we believe there are revenue synergies that can be realized by 2021 of $100 million.

The deal financials, purchase price of $355 million. EBITDA multiple in the low 8s after the tax benefits. And cash and GAAP EPS accretive in year 1, excluding transaction costs.

So on to Slide 22. Aspire is a joint venture with Carillion which we have talked about already. From January 2018, KBR has taken on full operational control and we are in advanced negotiation to purchase Carillion's shares in the joint venture. The associated earnings are in our guidance.

The key components of Aspire are as follows: A 35-year PFI contract with the U.K. MoD started in 2006. Scope includes a capital works program, which we talked about historically as 2020 -- Army 2020 and it also includes the maintenance of existing and the new facilities for the next 23 years, it's the U.K.'s largest government infrastructure, PFI.

Next slide. To give you an idea of what 2018 would look like with Aspire and SGT, we have included a couple of visuals here. As you can see, KBR continues its journey up the food chain into a greater combined level of technology and high-end services. In the doughnut on the bottom left, you can see that this now represents over 75% of our business.

In E&C itself, a lump sum EPC exposure is now less than 2%. So the majority of our earnings in E&C are coming from reimbursable projects and maintenance work. The resulting backlog on the right, which will sit at $22 billion with options, reflects new KBR's portfolio mix and risk profile. This is a key takeaway.

So on to Slide 24 and the final slide of what has been a long presentation today, thank you for listening. This is our summary of '17 and our priorities for '18. So in short, 2017 was a terrific year for KBR. We met or exceeded guidance every quarter, we had a terrific performance margin-wise, our cash flow was at the top of our guidance, the teams did a fantastic job integrating Wyle and HTSI to deliver those results. We really shored up our project execution and this came through in the results also.

So a really sort of strong platform going into 2018 and the markets are really, really helping us. There are very strong fundamentals across all 3 segments. As you've seen from Mark on earnings where -- and guidance we're targeting growth, and it's growth in earnings across all the segments. We will focus in on the integration of SGT and Aspire. Although they're very low-risk, we need to focus and make sure that they deliver the synergies we expect.

We will continue with our strategic discipline and of course, our commercial discipline. Because although the E&C market is recovering, that commercial discipline is critical to our success.

So in short, we delivered on our commitments in 2017, and we fully expect to continue to deliver on our commitments going into 2018.

With that, I'll hand over to the operator who'll open the call up for questions. Thank you.

(Operator Instructions) We'll go first to Chad Dillard with Deutsche Bank.

So last quarter, you guys guided to flat E&C revenues in 2018. I just want to get a sense for where that assumption's baked into the guide? And then also, you highlighted a clear line of sight to 3 projects that could get you there, I just wanted to get an update on where you stand with that?

Yes, I think the -- we did guide to that, you're quite correct. The expectation was that awards would come through in late Q4 to help support that. That has slipped somewhat to the right. So we feel that, that number will drop somewhat. We do expect, and we're seeing, a lot more of activity in the bidding cycle on what I would call quite robust opportunities. And we do, as I said, in my remarks, that we do expect backlog to grow through the 2008 (sic - 2018) cycle.

That's helpful. And then could you provide a little bit more color on the cost absorption issues that you called out in E&C? If I look at the 3Q to 4Q decremental margins they are around about 40%, which just seems a little bit larger than I would have thought. So can you just comment on how long do you expect the absorption issues to continue? At what run rate do expect them to continue? And do you have any line of sight to projects that will absorb this utilization?

Chad, this is Mark. So we did have some inefficiency as we're transitioning off of some contracts that have been completed or nearing completion. And as we repivot to new contracts that we expect to book in 2018, so there's a little bit of pressure there. And so we are counting on a restoration of at least sequential organic growth during '18 to absorb that inefficiency, and if we -- that will be, of course, incumbent upon new wins, which we're confident we'll see. If that doesn't happen, we'll have to do some cost reduction.

And we'll go next to Jamie Cook with Crédit Suisse.

Just some clarification on Ichthys. One, I just want to be clear. Are you the only contractor taking balance sheet risk here? I mean, on the $300 million to $400 million, and if so, why?

My second question is, the swing quarter-to-quarter on what you guys would have to potentially fund is up 3 to 4x the historic. How do you get comfort that that's the maximum number? And what's the strategy if funding requirements go up?

And then my third question is given where we sit today and with Ichthys, like, longer term, how do you think about the strategic rationale -- the strategic -- is E&C still strategic to you longer term?

Jamie, it's Mark. I'll open, and then Stuart can address the strategic question at the end. But our joint venture partners are clearly using their balance sheets in the exact same proportion as we are. We're 30% and the other 2 partners are 30% and 40%, respectively. And so what -- we are in constant dialogue with them, and they are seeing, and will see this same impact relative to their liquidity requirements, no difference there.

Relative to the second part, we engaged, as I did remark, a very thorough analysis of the cost to complete on the power plant in the fourth quarter after the discoveries we had made, and we did augment that with other parties to make sure we weren't drinking our own bath water. And we're confident that that cost is -- that estimate is contained.

There's always a risk, but we are confident that we'll achieve within that range and that range can be met with the $300 million to $400 million capital requirement I mentioned. So we're not expecting more above that number relative to completion.

Let me put a bit more meat on that bone. I mean, the work to complete the engineering allowed us to also do the full material takeoff. It gave us time as well to identify the material shortfalls and some of the materials that were misordered, so that's all been addressed. And it also gave us time and the biggest risk is really around sort of productivity.

And of course, we had a number of months of being able to sort of to really understand the true productivity on the site particularly once we came out affixing, I guess, what we call rework of execution that wasn't done very well. That's now behind us, so we've got, I guess, some clear water in terms of execution and driving to a conclusion on the job.

So using those productivity factors, having a full suite of drawings and engineering documents and also a full sort of material listing and having all that material now ordered, we're feeling pretty good about that estimate.

I would also remark that we've had a number of legacy projects that we, this management team has taken on. And we've -- a number of them were actually EPC power projects, and we managed to close them out successfully over the last few years. So this is not a new area for us, for sure. So we've got that same sort of team, [looking], has been very engaged in this.

And then on to your question about strategy and is E&C is still strategic for us, absolutely. We've not wavered from that path at all. We did recognize that the depressed E&C market that was in front of us had challenges in terms of transfer of risk as well as just general activity. And the fact that we've gone up the food chain in other areas of our business and expanded that just puts stability into KBR. And it's really allowed us to sort of reset the platform somewhat, but also not rush to the finishing line to do some something stupid.

So you'll see there's a modest revenue growth but really stability of revenue from '16 into '17. So we've done that. We've established quite a strong services base in E&C. We've retained all the capability we need for the upswing and I think we are very well positioned as the market starts to recover. So make no mistake, we're still very much in the E&C business.

And just, sorry, one other small question when you talked about funding the project as well as the acquisition, you guys threw in potential for an equity component. So can you just sort of elaborate on that and under what scenario you guys would consider issuing equity? And then I'll get back in queue.

Sure, Jamie. First, it's important that, as we consider our capital structure alternatives, we are very transparent and forthright with our investing base. And so by virtue of considering it, we wanted to share that here so there are no surprises later. If we decide to play that card, it's only a consideration at this stage.

I will add that when we originally embarked down this journey a year ago or so, we were planning to pursue funding through the private placement market. That market has been adversely impacted by some activity in the E&C space quite frankly, and that is less available and less attractive at this time.

That means that we have to consider debt in the category, which requires ratings. And so that is being part of the game plan going forward, so that we have all options available to us. And in conjunction with that, we have to be very mindful of our leverage and our ratings as we do have an E&C business, and it has volatility as you've seen.

And so we named a targeted leverage ratio of 2.75 in our May conference call, and there can be exceptions to that, and we're putting all of that on the table to consider what the best mix of financing is in this case, and we'll make that determination in the coming weeks or month or 2, that will evaluate things like stock price and liquidity in the credit markets and the ultimate view on where the average is going to shake out and the ratings are going to shake out.

We'll go next to the Andrew Kaplowitz with Citi.

Stuart and Mark, I just wanted to follow up on that last question in one sense. And that is, Stuart, I mean, you sound quite bullish about the prospects, especially in Government Services, and I know you have to sort of plan for all contingencies, but why would you issue equity if Government Services continues on its path, and you start to get these projects to come back, especially maybe LNG in 2018?

And given your stock is relatively depressed. So maybe you could sort of comment on the relatively bullish outlook with the possibility of issuing equity?

I think -- I mean, as Mark said, it's something under consideration. We've tried to be hugely transparent with the market. In our results, we have been very clear about the tax impact and have not muddled that around with anything, and we've tried to be very transparent to do the work to show you the performance of the business.

And certainly, as we sort of restructure our balance sheet, we're looking at all the options in front of us. And the last thing we wanted to do, I mean, you're quite right in terms of your assessment, but it is an option open to us, and it's clear that we need to review that as part of our strategy going forward. And we'll do that.

And the last thing that Mark and I wanted to do was to suddenly surprise the market in any way. So it's always an option for us, as he said, as Mark said, there have been changes in the capital market because of activity in the E&C sector, so we've got to look at those options.

But I think you're quite right, I am very bullish, I think we're in a terrific shape and I think the way that the team have ring-fenced Ichthys and the way that we deal with that, it really helps us with also not settling for a negotiate solution that is to our disadvantage because we've dealt with it in a ring-fenced way that allows us to allow that to play out.

So I think that's really positive. And then when you start to look at the rest of the business, it's in really, really good shape in really sort of upbeat markets but again, it's all about transparency and it's all about not surprising.

Stuart, that's helpful. I hate to sort of keep bringing up Ichthys, but let me just ask you this follow-up and that is, you guys have always sounded confident that in the end game, you'd sort of get the cash back over time.

But from our angle, what we see is, we see now this loan that's coming out and we see unapproved change orders continuing to go up. So maybe give us -- help us become more confident that KBR over the next couple of years really is going to get this cash back. What's in your mind around that?

I think, as I said before, the main issue for us isn't really execution, it's really the people, the consortium that walked off the job and didn't fulfill their obligations, and that we believe that's a clear breach of contract.

And we've got very strong legal opinions to back that up. U.S. GAAP is absolutely clear about the needs of being able to support your position. We've had a lot of third parties look at this to make sure the costs that we're spending are reasonable, that they're appropriate, that the way we're taking the work is efficient so the recovery of these costs are appropriate.

I mean, I think at the end, the wash-up of this is, of course, the numbers that we'll be claiming from the third parties here are much higher because of interest and because of other costs and things and damages and things. So I think overall, the claim is much higher than the cost and rightfully so. And we are in a situation now where we've just got to play that out.

I think the most important thing to take away from this is that our position here has been -- we've been conservative going through with our contingencies and reserves within the project and we're holding that line. And we've taken a very prudent approach to all the things that we do and Ichthys is no exception.

We'll go next to Tahira Afzal with KeyBanc Capital Markets.

I guess, just to change the topic a bit, could we talk a bit about any update on Magnolia LNG? We have started to see some pretty positive offtake agreements coming out on some of the other competing projects. Would love to get your thoughts if there's any -- if that bodes well for Magnolia, or whether it takes away, if those offtake commitments are going somewhere else?

I think it bears well for the LNG industry, in general, Tahira. I think we're seeing levels of activity in terms of offtakes being signed that we've not seen from some time. And I think what's also interesting is the length of tenure of these offtake agreements.

There's clearly an acceptance in the -- in I guess the users of a mix of long-term arrangements and taking some spot. So I think that bears well for the developer-led projects that there are still consumers out there that will take long-term arrangements, so I think it's a positive.

On Magnolia, specifically, I mean, their feedback is similar. I mean, they're upbeat, they feel that the market is turning in their favor. But I mean, other than that I mean, I guess it's not really for me to say, it's for them to say. But it's most certainly a positive in terms of the direction of where the LNG market is and their levels of activity that are ongoing.

Okay. I guess, the other question I had was around SGT. Clearly in terms of Wyle's positioning and all the work I've done enough, it makes complete sense from a profile perspective.

I am a little puzzled about the timing. Given you've got so many other moving pieces right now in the funding side, why was it important to get this in the mix at this point? And should I worry that indicates that even though if the E&C cycle is coming back, you would see it being a little different from what you expected last year?

Yes. Two very different questions. I think the timing of SGT, it's like all things in life, sometimes you can't dictate that timing and I mean, this was an asset that we sort of really knew about.

It was very well-regarded. It fit our profile. There was no overlap. There was a huge amount of positives around just how this would fit into our business. And they were at a time where they felt they had grown to circa $500 million and they needed to do something different to grow the company more.

The relationships that I have with the owner, I mean, he's a really, really sort of ethical and really sort of super guy and that went very well. And I think it's really sometimes you don't dictate the timing and I think, through this, we've managed the situation very, very well and it really adds to our portfolio.

And I would say that the integration risk associated with -- this is a really well-run company. I mean, it's not broken in any sense whatsoever. And so the integration risk associated with this is -- remembering it's a stand-alone business with all the things you need to do that means the integration risk is low, and we can be very be considerate about how we do that and the timing around that. So that piece is less of a concern.

In terms of the E&C market, the level of activity is still -- we still feel very bullish about that. I think the timing of just moving a quarter to the right is -- I mean, it seems to be, that's just a fact, there's no getting away from that, but the fundamentals are still very much the same.

We'll, excuse me, move next to Michael Dudas with Vertical Research.

First question, Stuart, regarding the acquisition. So maybe you can frame given your funding sources into Government Services, KBRwyle, the addition to NASA and U.K., how does it break out into your revenue mix? I'm assuming it does skew a little bit more NASA, U.K. now, than it has OCO or O&M in the past. Can you maybe give a sense of that? Is that strategic or just opportunistic?

I mean, SGT is usually strategic and as is Aspire for that matter. I mean, we'll take SGT first. I mean, we've set out our strategy to go further up the food chain to get differentiated around technology solutions and high-end engineering delivery and SGT takes us right there. I mean, they're a highly innovative company with a lot of smart people and with some fantastic contracts and a very solid reputation.

I mean, as you move up, they have no OCO money, it's all coming through different areas of the government into NASA or into NOAA or into the other agencies that they serve. So mostly, R&D and RDT&E and Operations & Maintenance. So highly strategic and exactly where we want to go.

I wouldn't say that -- I mean, the other piece on this is the base funding and the OCO funding that supports our existing logistics business in government is also very positive. But the acquisitive growth in SGT is highly strategic and really positions us well for the future, particularly in an exciting market that Space is today.

Aspire, I mean, that was put upon us because of the liquidation of Carillion. I mean, they were our joint venture partner. It's a very attractive business, it's performed exceedingly well since 2006 for us, and Carillion for that matter, but they have troubles elsewhere, put us in a position where we had to resolve that.

But I mean, strategically, it's 23 years of ongoing work that's under a PFI contract. They are far more attractive contracts than your standard contracts with Exxon because the government, if they cancel those contracts, there's huge penalties associated with the way the lending, funding is put in place.

So it's a really strong contractual position, very long-term, great returns, and it's something we know really, really well. So the continuity risk is low. So again, it's differentiated because we really understand these PFI contracts in the U.K. and it's -- the associated margin performance you'd expect given that differentiation is there.

Excellent. And my follow-up, further along these lines relative to SGT. I think you said close maybe March, in this quarter. Are there are a lot of retention agreements or ownership of the company or this is all -- I assume they're all just going to get cash from KB&R from a consideration standpoint.

I mean, when you highlight in the release about the multiple paid low 8s on a tax-affected EBITDA, could you maybe just a little bit more clarity on relative to your own Government Services margins and the mix and how that plays through? And how much of the tax impact adjusts the multiple there?

Yes. We've not disclosed the exact number there. But I mean, I think the important thing is it's GAAP and cash accretive from day 1. I think that's the first statement.

In terms of the people, yes, they are committed to staying. The management team, as we said in our press announcement, have committed to staying, and we know and will retain their current roles, et cetera. So I'm not -- we're not -- I think, we've addressed that appropriately.

It really is a people business and we recognize that as something we understand really well, and we've demonstrated in the past. So we're fully on top of that. Mark, is there any more you want to say on the numbers there?

Well, the margins of this business are exactly what you'd expect being NASA and NOAA concentrated. So while they are very high-end technology in the engineering and software space, those that do business in NASA know that margins are pretty tightly contained into a narrow range in the mid-single digits. And that's what you -- and that's what we should expect here.

And so as we've repeatedly said, what's really important about M&A in this space is revenue synergies. And to combine the great contract vehicles of SGT with the capabilities of KBR to go pursue incremental work. And also in SGT's case, they bring a very important IT capability. We have a good but relatively small IT capability.

When combined, we think there are great synergies there. So growing top line at fairly constrained margins, but doing so at scale is what drives not only accretion in year 1, but growth to that over time.

We'll take our next question from Brian Ruttenbur from Drexel Hamilton.

Lots of questions. First of all, on SGT. Can you talk a little bit about the historical growth? You just hit their profitability, but if you can talk a little bit about what they've seen over the last couple of years and what they see kind of going forward, growth-wise?

Yes. I mean, it's quite an interesting history. SGT started off as a small business, set aside, and they grew from 2 people in a garage and they built a business through a period of 10 years into -- and changed its -- obviously, status within government through that period. And they've been hugely successful and now they've got a terrific BD machine that really goes after these big programs and that's something we can really leverage.

I guess, I mean, more recently, they've won a very large contract, they've got 2 or 3 very big contracts, billion-dollar contracts, with -- long term with NASA, the most recent of which, they secured and kicked off a month ago called MSOC at Johnson Space Center. So that will bring on 400 to 500 people into the mix as part of their sort of offering going forward.

So they're growing well. They're very strong in the BD side and I think the expectation and growth rates for them is in line with what you'd expect in terms of the way that we've set out our growth aspirations in Government Services.

Okay. So they've seen growth the last couple of years in this market -- since '16, '17, they've seen growth?

Yes. Particularly, within the underlying win of this MSOC contract as well, really boosting their profile going into this year.

Okay. And then in terms of -- and their profitability has been the same, correct, during this whole time?

Yes. Their margins have actually improved over time. I think as they've transformed the business from a smaller business into a larger business through economies of scale and, actually, just working into some of these larger programs. As they grow things like their IT business which, as you would expect, has higher margin, as that's grown, there's sort of more return. So they've [inked] up the margin through time.

I'll just add to that, Brian. If you -- they -- Stuart mentioned the BD machine. So they have had aberrations in profitability when they have swung for the fences on some big procurements in their BD costs. And they've been remarkably successful in competing against top-tier contractors and taking work away from them. So those investments, while they did distort profitability from time to time, really paid off in terms of portfolio contracts that now are -- or soon will be ours.

And we'll move next to Steven Fisher with UBS.

I just want to start off on the E&C side. Just kind of curious if you could give a little more color on what gives you the confidence in the E&C bookings growth really kind of picking up in the first quarter.

And related to that, kind of the broader strategic rationale again, building on Jamie's question. Given the uncertainty of the timing and the pressure of what seems to be more fixed-price contracts going forward, how does that fit into the strategy of trying to deliver consistent, predictable results?

I forgot the first question.

Confidence in EC bookings.

So, I mean, I think Steve, the bookings are -- the (inaudible) bookings are from what's in the pipeline today and what we're actually bidding. This is -- I mean, we're not sort of grasping at straws or thinking the market fundamentals are great, so therefore -- these are actually things that are under bid, under -- they're bidding at the moment and have been for a while. The awards have slipped. And so that's really what gives us the confidence.

I think there are -- there's a number of opportunities that we feel that fit our risk profile in that hopper, so that's why we are sort of making the statements we are making. I think what we said all along is that we're not really interested in 5-bids-and-a-buy and lump sum EPC, low price wins, no differentiation. That's not our game and most people don't make very much money when they do that game.

So we're certainly not prepared and not interested in that sort of profile of bidding. Where we are interested, and we said this all along, is where we're in earlier, we can differentiate ourselves or negotiate deals. There will certainly be 1 or 2 or 3 that's been heavily involved in the front-end design and really understand the execution and can really get our arms around the risk.

And we are still very much prepared to be involved in projects like that. I think the other key point is our Maintenance business and our Services businesses across the world have done really well, and it's really given us -- out of that 20-plus percent of profile looking forward, into '18 and E&C, a large proportion of that is in that arena. So that drives the consistency. And I think you've seen that coming through the results, and that's exactly where we're heading.

Helpful addition to that as we think about pro forma 2018 mix, assuming SGT closes, is you've got about 60% of EBITDA or earnings from the GS business, another 20-ish percent from T&C and the rest 20% from E&C. So that's how the business has transformed in terms of contribution over the years and more recently from both Aspire and SGT bumping up the GS numbers.

Got it. And then just a clarification. Can you just remind us how much extra annual profit you pick up from taking over all of Aspire? And then what's the ramp-up of the $100 million of synergies by 2021 related to SGT?

We have not, and don't disclose the individual performance of contracts. So Aspire is really a -- one singular program. So it's a meaningful bump up by taking over Carillion's share at very low risk, in this case. And so as Stuart mentioned, while this was thrust upon us, we couldn't be more delighted and that helps in the contribution for '18 growth and over SGT.

I mean, I think that piece with Aspire is that we said that this -- as Mark said, the 7% growth in the base business and that there's a 4% headwind associated with Ichthys interest and you guys can do the math. I mean, we don't disclose individual contracts, but you can actually see where the underlying growth in the business with Aspire in there is up 11%, 12%. And on SGT, would you just repeat the question, Steve?

If synergies by 2021, are they equally split or...

(inaudible) Yes. I mean, it's an interesting question because I think it will be pretty steady through time and the reason I say that is that we're clearly in some of the same markets, particularly opposite NASA, although there is no clashes of programs that we certainly will be increasing our probability of win by combining the capabilities, which is a key piece in the assessment of who wins and loses these contracts. And by coming together, we'll certainly enhance that, and that will include things that are underbid today. And so we feel that, that will start to come through over the next 6 to 9 months, and then progressively through 2021 as we go after these larger procurement opportunities that we can do combined. So I think it'll be a pretty steady -- it will take 6 to 9 months to start to see the real generation of those synergies, but pretty steady thereafter. I mean, as you know the government procurement cycle isn't a quick one.

We'll take our last question from Jerry Revich from Goldman Sachs.

You folks have had some excellent year in bookings for Government Services, really strong book-to-bill, can you just talk about the timing of the ramp-up, generally? Obviously, the Aspire ramp-up will be significant in '18, on top of whatever the organic underlying growth is. Can you just help us understand the cadence of the ramp, of the business you won in '17? And over what time frame we can get to that 1.2 bookings ahead of revenue effectively that you delivered in '17?

Yes, I think probably the way to think about that, the easiest way to think about it is, just our growth aspirations going from '17 to '18. I think that's how it ramps up. I mean that obviously does not include SGT because we haven't closed that yet, but that's really how it's going to move forward. And to come through in the earnings line. I think the other thing I would draw your attention to is really just where we are in a backlog perspective. We've -- I think we've really done a good job -- the team has done a good job to really grow that backlog and to start out with a pro forma with SGT under Aspire in there. You know that, that backlog's sitting at $22 billion with its risk -- associated risk profile and free cash flow performance is very, very attractive. And the other piece that people don't talk enough about in our business as far as I'm concerned is technology. And the book-to-bill of 2.6 in Q4, the margin performance, the revenue line, it gets, because of its relative scale, it probably gets missed. But when you start to look at the earnings profile and the fact that 20% of our earnings in '17 and looking to be at that level going into '18, is a substantial part on KBR and one that comes within in a blind market and a business that's growing. So again, as Mark said, if you look at that technology business of 20% and our government business at 60%-plus, 80% of new KBR is really the high-end technology solutions and high-end engineering sort of reimbursable services space, which I think is very attractive, particularly opposite the backlog, which underpins it.

And I know you normally don't talk about single project profitability but in this case, given the moving pieces on Ichthys, I'm wondering if you could talk about within the earnings guidance what level of contribution is embedded from Ichthys in '18? And if you could just frame the unapproved change orders for us, for the JKC joint venture, it's roughly $2.4 billion, and we're talking about another $1.2 billion of additional capital. So out of that, call it, $3.5 billion, what proportion of the dispute is with the client? What proportion is with all of the subcontractors? Can you just frame that for us?

Mark?

The profit contribution from Ichthys is pretty much only what was diluted out of '17. So that's largely a shift in extension of time, and it's a modest amount of the overall E&C contribution for the year, but it's important -- it is important to get and it is in our numbers, and I'll leave it at that. But -- since we don't talk about individual elements. So it is important to have our progress continue at pace and to finish the program in early '19, as we've said, to achieve that and not have any interruptions along the way. Relative to all of the unapproved change orders as we've disclosed, a meaningful amount, a majority of the amount of unapproved change orders, relative to the part of the contract, except for the power plant, a majority of those unapproved change orders have been funded by the client and all the terms relative to that funding have been disclosed in our K. And so -- and the pace of that activity will slow down as the project completes. But at the same time, the costs we're incurring on the power plant are increasing, and we don't expect any recoveries from that in the near term. We certainly will be pursuing them, but I think I was clear on setting the expectations there. So the joint venture largely will be self-funding the project through completion, and we will be negotiating the final outstanding amounts from our client as we go through that and hopefully, we'll have some success in that in '19. Does that help?

Okay. Yes, I think we've kind of run overtime somewhat. I think quite a busy close to the end of the year. I'm sure there will be follow-up calls, which obviously we'll look forward to. So with that, thank you for listening, and thank you for listening to quite a long presentation, quite a lot happening. And yes, have a good day. Thank you.

Thank you, sir. And that does conclude a recall for today. Thank you for participating. You may disconnect at this time.