Logo of jester cap with thought bubble.

Image source: The Motley Fool.

KBR Inc  (NYSE:KBR)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to KBR Inc's Third Quarter 2018 Earnings Conference Call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time.

For opening remarks and introductions, I would like to turn the call over to Alison Vasquez. Please go ahead.

Alison Vasquez -- Vice President, Investor Relations

Good morning, and thank you for joining us for KBR's third quarter 2018 earnings call. Joining us today are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will discuss highlights from the third quarter the market outlook, our financial results and the company's earnings expectations for 2018.

After these remarks, we will open the call for questions. Today's earnings presentation is available on the Investor section of our website at kbr.com. I would like to remind the audience that this discussion may include forward-looking statements, reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in our press release, Form 10-Q and current report on Form 8-K, all available on our website.

I will now turn the call over to Stuart.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thank you, Alison. Good morning and thank you for joining us. I will start on slide 4. As you can see our safety performance continues to trend well, what you don't see is the huge level of engagement and commitment required to deliver this performance. Our Zero Harm and Courage to Care programs have been embraced by our people across the globe and I wish to thank them for being vigilant day in, day out.

As we say, KBR, good safety is simply good business, which takes us nicely on to slide 5. The graphs tell the story, it's a great time to be part of KBR and our strategy is delivering across all our key metrics. All our end markets are strong and our opportunity pipeline is significant more of this later. Third quarter year-on-year revenue growth was a pleasing 24%, and this was underpinned by 59% growth in our Government Services business. And please note, 12% of this growth was organic, which we think is industry leading.

Technology continues to outperform. Great Margins and cash conversion and year-on-year organic growth of 35%. In hydrocarbon services, we delivered good margins, there were no surprises, no execution issues and in fact we handed over the final US legacy lump sum projects in the quarter and reached mechanical completion on a lump sum EPC project in Europe, both slightly ahead of budget, benefiting from execution improvement initiatives we put in place after 2016.

Our excess Joint venture had a very favorable ruling which derisks and gives clarity and significantly reinforces our confidence and our position on reimbursable costs, more on this later. EBITDA was up 44%, which demonstrates not only good execution, but continued focus on cost control and margin enhancement. Cash conversion across the company was 1.2 in the quarter, which is a reflection of the greater mix of low capital intensity professional services and technologies, a core element of our transformational efforts.

Backlog at the consolidated level was up significantly year-on-year, but importantly, the book-to-bill for the quarter was 1.1x, underpinned by strong bookings and government services on technology. In hydrocarbons, our backlog has been steady over the past five quarters as we work off legacy projects and replace these with more recurring revenue type projects and we show this in the appendices. The quality of earnings and associated cash conversion of the current backlog combined with the longer-term nature of the contracts, record backlog and technology and stable hydrocarbons backlog gives KBR a solid platform as we head into 2019. And if you layer on the tailwinds in our market, the future is bright. So all up, a very pleasing quarter that keeps our momentum going.

On to slide 6, the market outlook. Government spending in areas conducive to our service offerings continues to be very, very healthy. Our opportunity pipeline continues to grow and we are seeing an increasing trend to best value selections for scope and services to be bundled together and lay under one contract. This of course, favors scale but also broad capability and this is good for KBR.

As a result of these trends on the capabilities portfolio we've built, we have substantial additional growth catalysts across the Department of Defense, including LOGCAP V, which has been delayed until April 2019. And we have substantial opportunity in the space community including NASA. Internationally, our performance has been above expectation with our business in Australia growing significantly and then the UK underpinned by the large PFI contract, we are growing earnings nicely from an already significant base.

The demand for our technology continues across the globe. This is driven by changing maritime fuel regulations, global demand for fertilizers and the ongoing increased activity in the downstream sector. As previously presented, we have three proprietary first of a kind technologies, all have commercial scale plants under commissioning or in early stage operation and plus with the only independent licensor of polycarbonate technology. This all places us nicely for future expansion.

In hydrocarbons, our OpEx facing business, which focuses on brownfield services and maintenance, including Brown & Root, it's also seeing double-digit growth. With many new facilities being built particularly in the Gulf Coast, the outlook remains very, very positive. The CapEx side of the business continues to gather momentum with LNG and downstream including specialty chemicals, the pipeline growing across all three from the beginning of this year.

As you know, backlog growth can be lumpy, but we are well positioned on a number of LNG, chemicals and downstream projects that will FID into 2019. Our near-term pipeline is circa $38 billion today, and this is broken down to submitted awaiting decisions and beds under preparation in the pie charts.

On to slide 7, Ichthys, our last legacy project. So, an update, on the main facilities both trains are now handed over as at all the associated packages, et cetera. The customer has announced they've produced first LNG and the official opening is scheduled for November, so really good news there. Onto the CCP power station, we have noted down the final estimate to complete based on more rework we've discovered, the fixed approved quality of the original contractor, taking into account current productivity trends and the fact we're now working with a live LNG plant next door. This has resulted in some schedule slippage, and of course associated cost growth.

We've dealt with the modest P&L impact of this via dilution, et cetera this quarter so no issue there, this doesn't mean, however, we will need to send some additional cash, which again we can manage and Mark will walk you through this later. The five gas turbine generators are now with the client and handed over, which leaves the three steam turbines to complete. Mechanical completion is scheduled in circa 9 to 10 week and then we'll move into a commissioning phase, which will finish in Q2 2019. So we will be demanding as we head into the year end with a small commissioning team continuing into 2019. So in short, we have a clear line of sight to the end.

As I mentioned earlier, there was another important development recently from the excess project. Earlier this month. JKC, our joint venture received a very favorable ruling via arbitration which is binding, related directly to reimbursable costs that were being contested by the client. This significantly derisks this portion of unapproved change orders and JKC will be seeking a contractual change accordingly. We have full disclosure of this on our 10-Q, which we filed today.

The CCPP arbitration has been set both for merit and quantum for early 2020. So, reached a certainty on Ichthys with LNG being produced, a clear line of sight to the finish of the power station, the favorable ruling, resulting and a de-risking in the quarter on firm dates for the CCPP arbitration.

Now, I'll hand over to Mark.

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Thanks, Stuart. I will pick it up on slide 9. First upfront, let me remind you with a couple of things. First Q3 includes a full quarter or SGT that we acquired in late April, 2018. Additionally, due to the consolidation of the subcontracting entities in the Aspire Defense program in the first quarter of this year, just be reminded that earnings of those entities previously recognized through equity in earnings are now reported through revenue and gross profit.

Now let me move on to the numbers. Q3 2018 financial performance was favorable where we achieved at or above expectations on all fronts. We are particularly pleased with the double-digit consolidated top line revenue growth for the second consecutive quarter, and also on a year-to-date basis. This has been driven by continued double-digit organic growth by our government business in each quarter this fiscal year, including 12% organic growth for Q3. Our technology business has been driving our overall growth results as well, with double-digit organic growth rate on a year-to-date basis and 35% organic growth in Q3.

The overall revenue growth has translated nicely to earnings growth, with strong margins across each of our three segments all year including Q3, which we attributed to execution by our employees, portfolio moves made as part of our transformation and healthy market conditions. Our base margins in government are now targeted consistently in the upper single-digits enhanced by about third of its profits coming from international sources which run at a higher margin than our US sources.

Government margin in Q3 of about 10% was also boosted by 1 percentage point from favorable project closeouts. Technology continued its strong momentum with growth across its offering base and with margins at 28% above our guided targets. We're seeing an expansion of project contract values in line with our strategy to package or bundle our license technologies, our engineering services, proprietary equipment and catalyst together as a complete solution.

Our hydrocarbon services performance was in line with expectations. We particularly like to highlight a strong performance of our Brown & Root Industrial Services joint venture, which is continuing to grow and deliver profits well above last year's results. Additionally, as Stuart mentioned earlier, we achieved significant milestones during the quarter on two lump sum EPC projects both adding favorable impacts to Q3 results.

G&A was flat quarter-over-quarter and due to timing items was less than the normative we would expect going forward. The nominal spending level is in a low-to-mid $40 million range per quarter, so take that into account going forward. Non-operating items were largely on track, whereas our tax rate of 28% was higher than our normative rate, this was due to new guidance received this quarter from the IRS from last year's tax reform act.

The impact of the new guidance limits our ability to offset taxes on international operations with foreign tax credits and with our mix of international business, we see this increasing our annual effective tax rate by 1% this fiscal year. The effect was higher than 1% in Q3 as we had to catch-up on a year-to-date basis. Despite the incremental tax expense, we still delivered strong earnings and execution across the business. GAAP EPS was $0.41 and adjusted EPS was $0.46. As expected, we continued to make progress on operating cash flow, bringing in $72 million of net inflows for the quarter or 25% above our net income level.

Moving on to slide 10. As highlighted here, our quarterly revenue and profit margins are trending nicely and earnings are highly correlated with revenue levels. This is consistent with our strategy to increase our exposure to more attractive markets and increased mix of recurring professional services and technology based offerings.

And as we said and recently demonstrated this strategy enables selective pursuit of strategically aligned lump sum EPC projects going forward. In government recent profit growth is attributable to our greater role on the Aspire Defence program in the UK, the addition of SGT and also double-digit organic growth and healthy margin levels in each quarter this fiscal year. Technology continues to deliver double-digit growth and has exceeded our targeted mid 20% margin level each quarter this fiscal year.

Our hydrocarbon services, there's been more revenue volatility with project completions and adjustments, profits have tracked within our targeted expectations. The performance of our joint ventures in this segment, particularly, as I said earlier with Brown & Root Industrial Services and also other international joint ventures has registered strong performance throughout this year and contributed more consistently to profitability.

Now, on to slide 11 and some capital structure remarks. Our financial position is tracking as expected with debt increasing as we fund our portion of the final stages of the Ichthys Project. The strong growth in EBITDA outpaced the additional leverage and fueled a downtick in the leverage ratio this quarter, which is comfortably in the targeted 3 to 3.5 time zone we've set, coming out of the refinancing transaction done earlier this year.

As Stuart mentioned earlier, we expect to incur additional estimated cost to complete Ichthys. As a result, we are increasing our estimated cash investment to the joint venture by a $100 million to carry us through the completion date in Q2 of next year. As we have consistently disclosed, we ultimately expect significant cash recoveries in future periods as we go through various negotiations and adjudication processes. Favorable arbitration ruling we received in October further bolsters our confidence in resolving these matters with the client in a manner consistent with how we have reported.

There's plenty of headroom in our credit agreement to accommodate all of this and that assumes we do not receive any recoveries in the interim. We also executed a swap transaction to fix rates on $500 million of debt. We did this in October to mitigate variable interest rate risk. This represents a fix-to-float ratio of 43%.

Now onto slide 12 and as Stuart tipped earlier, our recent performance and earnings growth momentum allows us to bump up guidance that we increased back in Q2. Despite the impact of the increased tax rate, we are now guiding to an adjusted EPS guidance range on a $1.45 to $1.55. The guided cash flow range of $125 million to $175 million is unchanged.

With that, I'll turn it back to Stuart for closing remarks.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thanks, Mark. On to slide 13 and to wrap up today's presentation. As I said in my opening remarks, this is a great time to be at KBR. We have solid momentum, a line of sight to year end and a very healthy backlog and more importantly, a strong associated quality of earnings and cash conversion outlook into 2019 and beyond.

Our Government and Technology businesses are growing above market and our hydrocarbon business is performing well and poised to take advantage of the market upswing. All our end market are buoyant and we are delivering without negative surprises on material write downs. Our new business pipeline is significant and supports continued growth expansion.

With that, we are again increasing our EPS guidance. I will now hand back the call to the operator, who will open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We can now take our first question from Tahira Afzal of KeyBanc.

Tahira Afzal -- KeyBanc Capital Markets, Inc. -- Analyst

Hi, folks, and congratulations to your team on a safe and strong execution quarter.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thank you.

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Thanks, Tahira.

Tahira Afzal -- KeyBanc Capital Markets, Inc. -- Analyst

I guess, first question is if you look at all the moving parts and the timing of some of your outsized LNG awards, Stuart, how much of a confidence level do you have that by the time you report fourth quarter, you will have announced one LNG project in your backlog? And if so, are you still off the opinion that you could as a consequence start to see, your breakout scenario for oil and gas really emerge into the second half of '19?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, I think that your timing is tricky. I mean it's not really within our control as you know, I think we're -- I think the important thing is to look at the size of the pipeline, and the other thing that the market well understands that projects we're following and where they sit. I think if it doesn't happen pre the end of the year, it will happen as we move into the early part of '19, and where we were feeling pretty good about that. And I think that the other piece to note here is that we're actually achieving our breakout case essentially in government services without the award of LOGCAP V and that's now moved to April.

So -- and we are achieving a breakout case in technology that we didn't think we will be achieving. So it's an interesting question on the one area where we're not achieving the breakout case today. But certainly, I think the market is there to support that and I think the pipeline of opportunities that we showed you in the graphs, in the pie charts support that.

Tahira Afzal -- KeyBanc Capital Markets, Inc. -- Analyst

Yeah. And Stuart, just on -- and maybe this is more for Mark. Just on Ichthys, the $100 million for me it's little high. Can you put that into perspective? Have you build a bit of a cushion into it? And how much confidence do you have more so because our history of power plants and how their end has essentially been a little mixed?

Stuart J. B. Bradie -- President and Chief Executive Officer

Let me talk about the power station just where we are and that process and Mark, can talk about the cash element. So you're quite right to hear that the industry is -- there's a lot of grave stones in that graveyard to see power station on it for companies and we lived that as you know through Marshalltown and others back when I first joined KBR.

I think we've got -- we went through the scars that we've had in that history, we're pretty clear about where we are in this execution process. As I said earlier, we are heading to the finishing line the five gas turbines are handed over, we know exactly what we're going to do. We're well on the steam turbines themselves, we're well over 90% complete and construction and we've got a clear line of sight to the end.

So, I'm pretty confident in terms of where we are in the construction phase, I am pretty confident that we've got the right productivity numbers in there, based on what we're actually achieving today, so we're not looking at acceleration of doing better, we've actually forecast this in that manner with the appropriate sort of weather risk and LNG sort of live plant risk just causing delays.

So that's why we bumped out a full quarter, because we think the commissioning will take longer just because of -- it is a combined cycle we are commissioning and we understand that fully from our Marshalltown experience. So I think we've got the right people there, a lot of them from Marshalltown, we've got a clear line of sight to the end. So I'm feeling pretty good about that forecast and I'll let Mark just talk about the cash.

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Tahira, a majority of the $100 million is the cost or estimated cost increase, as Stuart just mentioned to finish the power plants. So we feel comfortable with that estimate. The remainder is actually what we didn't expect was the client applied some offsets and effectively required us to pay the LDs, this quarter, which we otherwise would have expected way down the road in an ultimate resolution of one kind of another and quite frankly, we would expect that to be a net inflow for us.

So that was the difference between the cost estimate on the power plant and the remaining part of that $100 million, we know we'll search and try to get that back in some way or the other, but it's prudent to lay that out there as an expectation to the market, and of course, I mentioned that we assume no other recoveries, relative to amount to do us, until we go through the litigation process or settlement process. So we think it's a prudent and conservative number at this time.

Operator

Thank you. We can now take our next question from Jerry Revich of Goldman Sachs.

Jerry Revich -- Goldman Sachs & Co. -- Analyst

Yes, hi, good morning. Can you hear me?

Stuart J. B. Bradie -- President and Chief Executive Officer

Jerry, you might be on mute. Yes.

Jerry Revich -- Goldman Sachs & Co. -- Analyst

Okay, perfect. Good morning, everyone. I'm wondering, if you could talk about as we head into '19, how the timing around major project opportunities are shifted? I guess we're hearing from a number of LNG operators that are potentially moving forward toward FID faster than we would have thought just three months ago. Can you just talk about what you're seeing in the marketplace on LNG specifically and across other energy projects? Thanks.

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, I think similar, thanks Jerry. I think this might go there came out and as you said there were delaying FID is the -- over the last couple of days and still very confident that going to achieve it, if you listen to what they say, but that's move to first quarter '19. Others are coming forward I think, there is a recognition in the marketplace that as the market heats up, the first to get going, get the best pricing. I guess probably get the best people and that sort of thing. So I do think that there is a drive to move forward reasonably quickly.

But again, I would just -- I would take you straight back to the pie chart and just look at the pipeline of opportunities is coming through, as the number of projects that we've tendered and the number on the preparation which will be tended in the next month or so, a couple of months. It's a substantial volume and if we win our fair share of those, I think we will be in really good shape in both government services in terms of looking at growth going into next year, but also in hydrocarbon services in terms of that backlog picture. So we're feeling pretty good about that.

Jerry Revich -- Goldman Sachs & Co. -- Analyst

And can you expand within the government services opportunities that, how much -- what's in that bid pipeline, it's core in terms of the existing portfolio versus what are some areas in terms of how big is opportunity to expand into new capabilities that have not been part of the KBRwyle portfolio in the past?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, so there's a number of those that're are right in our wheelhouse like LOGCAP V and obviously a number of NASA bids that are sucker of $1 billion that we've got ongoing today. But I would just -- we've -- it's been announced not by us, but by the customer that we've been successful in a bid recently called Potiv (ph) which is really to do with human health performance around the special forces and we took really the work that we are doing with NASA on our human health performance contract and combine that with our relationship and understanding of the army and put that sort of citable past experience together in one bundle together with obviously, the technical skill sets, whether that'd be on the psychological side, on the medical side and fill that altogether and we've just been awarded that, which is circa $500 million. The nuts and absolute slumdog synergy, that's a takeaway, it's new business for KBR, it's a complete part of our growth story. So I think there's a combination of both in that space, and I think we're proving that out with the wins that we're securing.

Operator

(Operator Instructions) We will now take our next question from Jamie Cook of Credit Suisse.

Jamie L. Cook -- Credit Suisse -- Analyst

Hi, good morning, a nice quarter. I guess my first question Stuart to use is more of a strategic one, obviously, saw that Jacobs' announcement to sell their energy chemical on resource business to Worley. I think the multiple that they got was pretty good and it was sort of a business model that you were shifting more toward more sort of OpEx versus CapEx or lower risk. So in that context, how do you think about the strategic importance of the hydrocarbon services business, given the multiple that Jacobs just received?

And then my second question within hydrocarbon services, when you're looking at some of these big LNG projects or petrochemical projects that are starting to move forward, we're hearing contractors getting concerned about, labor constraints are ensuring that they're going to sequence the projects correctly. Is any of that concern out there changing sort of terms and conditions of these projects or is it still too early to get that constructive? Thank you.

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah. Thanks, Jamie. Yeah, on the services side of the business, I mean that's growing very nicely for KBR over the last few years, as you're aware and as Mark alluded to it's -- not alluded to, stated and -- for double-digit growth in that side of the business. So I think it's -- I think what it does do, is it prevents -- it presents a remarkable firm base for KBR and allows us to have predictable earnings to be very, very selective, as we always said that I guess we have more in the LNG club than Jacobs or Worley-Parsons. And certainly on that big projects, our reputation and our capabilities are little bit different.

And so I think that we -- it allows us to really sort of get a firm base sort of work strategically focus on key persist that we feel are of the right risk profile or we can negotiate the deal, it's our technology et cetera, we said all along. So I do think is very, very important as you've seen with the Jacobs' transaction is very sort of valued in the marketplace in terms of the -- hopefully it sits in the -- it should be a very strong cash generator in albeit a lower margin business, but a lower risk. So I do think it's very important, I'm very pleased that we've managed to grow that bit of the business business very well.

In terms of resource constraints on larger projects, I think it's too early to call, I think people are, it's interesting how the market shifts. A few months ago, it was Oh, Goodness Me, people were light and go people, but now things are changing and people are getting concerned about resources and probably rightfully. So -- but as we know Jamie, the predicted FID dates never happened on time, they tend to slip, and so I think I'll be more staged and I think we will watch that obviously carefully, but I don't think it's going to be a constraint to KBR in terms of ramping up on those projects.

Operator

Thank you. We can now take our next question from Michael Dudas of Vertical Research. Please go ahead, your line is open.

Michael Dudas -- Vertical Research -- Analyst

Good morning, gentlemen and Alison.

Alison Vasquez -- Vice President, Investor Relations

Good morning.

Stuart J. B. Bradie -- President and Chief Executive Officer

Good morning, Michael.

Michael Dudas -- Vertical Research -- Analyst

The delay can be off-putting. Looking at your book-to-bill numbers and terrific organic revenue growth in Government services, which has been above most any other of your peers in the space, maybe how -- some of the success, I know that the $500 million project is probably part of it, but to have that type of growth and how could we look at when you look at the book-to-bills and the revenue opportunities going into 2019, as you start to anniversary SGT and Aspire for the level of organic growth, see now that business going into '19?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, Mike, the -- I mean the -- that's why we call out, we don't just look at the actual growth in government, we actually call it organic growth sort of from one year to the other based on the sort of apples-for-apples comparison. So, I think the organic growth is terrific and that's why we call that as industry leading. So I think that's one point. The second, -- the part of bid, I talked about is, is just been awarded as part of the future it's not part of the past. So again it will sustain growth as we move forward. Mark, any more?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Well, I think I'll build on one of the previous questions as well. And Stuart alluded to this, the synergy opportunities are really piling up, Stuart mentioned the part of opportunity which is providing Health and Human performance to the special operations. We announced the identified friend info opportunity that we have one with a foreign customer, which I think is a synergy with our commercial business. And our geographical presence, we also are working on something pretty substantial in the Middle East on the government side through our UK, positioning and others.

And so, all those and others including LOGCAP V and some of the things we've talked about in NASA which are to some degree bundling of procurements and teamwork across the SGT, Worley and HTSI are very sizable opportunities that could really move the needle and book-to-bill in future quarters and much of that is incremental growth opportunity. Some of it is all incremental growth opportunities, such as Potiv, such as IFF, such as the Middle East opportunity and some of the NASA staff.

So we're running well with the current base of business we have in our global positioning across all elements, so SGT is contributing, we don't include Aspire growth in the organic calculation because it's little distortive. So we look at our logistics business, our space business, our engineering business and even Asia and Europe are driving elements of that 12% and have done so all year. And I think the final piece there is really LOGCAP V, as well which we did expect to happen sooner and it has now been confirmed to be awarded in April. And the -- I guess the growth opportunities surrounding that one contract is significant.

Michael Dudas -- Vertical Research -- Analyst

Duly noted. And my follow-up looking at current budget going into 2019 a lot of bills have been passed for a reason in such. Do you get the sense that the customer base DoD is feeling comfortable about driving forward with spending and getting and letting out word in opportunities for you and is that providing opportunities to help maybe bundle and get some of these new innovation of your -- printing your -- writing your skill sets together to win the new type of business with that increased confidence level from DoD?

Stuart J. B. Bradie -- President and Chief Executive Officer

No, absolutely. Mike, I think I said on my remarks that we are seeing that change, there is more bundling of procurement, there's more best value awards and that's really -- they're really pleased to sort of breadth of capability and scale in the areas for replay. So I do think it really sort of sits well for KBR going into '19.

Operator

Thank you. We can now take our next question from Steven Fisher of UBS.

Steven Fisher -- UBS -- Analyst

Thanks, good morning. I wonder if you could just talk about or clarify what the cash impact of the favorable ruling is related to Ichthys on cash flow, it sounds like there might be some puts and takes here with $100 million, but the $322 million is a ruling. And then I guess related, but separately what drives the ramp up in cash flow in Q4?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Okay. Thanks, Steven, it's Mark here. The favorable ruling, I know it's fairly complex, this is why we've provided a very robust disclosure in our 10-Q within the unapproved change orders of roughly $950 million to around a little bit, we disclosed in this morning's queue, hopefully you've seen it that about $330 million of that number pertains to -- directly to this decision and we've already received that money. So this decision affirms our confidence that we won't have to pay it back.

And so that was a risk that is mitigated and there are -- there is probably some other minor change orders out there that may be collectible as a result of 2.6.3, but I think the main takeaway as we have already received that money, but it's not a threat relative to having to refunded as was stated in the deed of settlement, also laid out in our disclosure, so hopefully, it clarifies that.

Relative to the cash flow for the fourth quarter. So we are sitting at $35 million positive year-to-date, Q4 net income ballpark is about $50 million. We expect to convert that on a one-to-one basis. We also have some what I would call pent-up dividends from our joint ventures. We have not received much in terms of cash from our JVs all year. We expect the change out in the fourth quarter, that's a double-digit number. We also have paid retention, pretty significant one due on a hydrocarbon services project that we expect to collect in the fourth quarter, we are hoping to get in the third quarter, it didn't quite happen.

And then we also have a government settlement that we expect in the fourth quarter. So all those things piled on to the year-to-date number plus the cash earnings in Q4, get us comfortably in the range.

Steven Fisher -- UBS -- Analyst

Great. Thanks, Mark. And then can you talk about the trajectory of government margins from here? Will NASA mix increase materially over the next year? And if it does, how would that affect overall margins or are there other pieces of the business that would be growing to sort of offset that financial mix headwind?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Yeah, I think there's other bids growing to offset that Steve. And I think we've sort of said high-single digits, mid-to-high single-digits going forward and it might tick down a little bit going into next year, but it's going to be in that ballpark.

Operator

Thank you. We can now take our next question from Chad Dillard of Deutsche Bank.

Chad Dillard -- Deutsche Bank -- Analyst

Hi, good morning, everyone.

Stuart J. B. Bradie -- President and Chief Executive Officer

Good morning, Chad.

Chad Dillard -- Deutsche Bank -- Analyst

Hi, how are you guys doing? So I just wanted to dig into the T&C business. Can you talk a little bit about the project pipeline, what you're seeing there and in particular, how much of that business comes from China? And what are you seeing? And if you're seeing any change in confidence for capacity additions in that part of the world?

Stuart J. B. Bradie -- President and Chief Executive Officer

So I guess first -- last part first. We're seeing no change in confidence and in that regards no slowdown in activity, our pipeline today is at record levels. We do quite a bit of business in China, as you know, but we also, I mean, the technology business wise nature is global. So we're done four ethylene licenses this year, two Korea for example. So I think it's firing on all cylinders. We're excited about the new technologies that we're bringing to market, we are excited about our polycarbonate technology, it's returning very, very good numbers for us.

And so I think all up, we're not seeing any slowdown in fact, there seems to be momentum behind that market and particularly with the changes in maritime fuel and things like that, it's going very, very well, but we are seeing absolutely no slowdown, it's actually going the other way.

Chad Dillard -- Deutsche Bank -- Analyst

Got it. And then over to with the hydrocarbon services business, we have about $20 billion odd in your project pipeline. Could you break out how much is LNG versus other oil and gas? And then what's your confidence level being able to grow backlog through the end of this year?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

So I was just trying to look, it's pretty clear majority is LNG. There are some downstream petrochem projects there. As we've talked about in the past, but you can say that well above 50% is clearly LNG and projects that we have talked about over time.

Stuart J. B. Bradie -- President and Chief Executive Officer

And I think the other piece to that is that we have secured projects that you're aware of things like the Methanex project that the main EPC component is not in backlog yet. The chemi (ph) specialty project -- chemicals projects that EPC is not in backlog yet and those will convert into backlog as we move into '19. So we're feeling pretty good about some of the non-LNG components as well. But Mark is quite right, I guess there is a number of needle movers there in the LNG side just by their very nature.

Operator

Thank you. We can now take our next question from Lucy Guo of Cowen & Company.

Lucy Guo -- Cowen & Company -- Analyst

Good morning. Follow-up on the earlier question on government services. Mark, you gave a host of new opportunities and potentials, existing opportunities. I was wondering if you can help us quantify roughly in your $13 billion pipeline plus, $2 billion to be submitted. What's the new business and take away next versus recompete?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Well Lucy, first, thank you for joining the call. It's pleasure to hear your voice. We have pretty bit -- been pretty open that the largest single item in the pipeline, there is the LOGCAP V opportunity. And as you, and I think, well understand, that would be an expanded recompete opportunity, so it's a mix of sustaining business and incremental business due to change in scope and the structure of that procurement. So that's a mixed bag. The next biggest one that we have not quantified, other than saying it's over a $1 billion is a large NASA opportunity that would be all incremental work that is, I would call it a command and control or even a C4ISR related opportunity that you probably have heard of.

And the others are, we do have one pretty big recompete with the Marines under prepositioned stock that's north of $500 million and we are working on a couple of opportunities I mentioned that are not in the US to include UK and a Saudi opportunity that are in excess of $500 million that are all incremental work. And so just scanning down the list, I would say that good 50% plus of this number is growth opportunity incremental to current scope.

Stuart J. B. Bradie -- President and Chief Executive Officer

And if you layer on Potiv which we've already secured under Kennedy BOSS Award, which we won last quarter, which is under protest. And that protest is -- we will hear about that before the end of the year. So -- and both of those are complete takeaways.

Lucy Guo -- Cowen & Company -- Analyst

So, it sounds like, in your pipeline, the mix of new business is probably more than what's in your existing funded orders and your current revenue profile?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

I think, excluding LOGCAP V, that's absolutely correct.

Lucy Guo -- Cowen & Company -- Analyst

Right. So, in terms of excluding LOGCAP V, do you -- so, it sounds like there is maybe one other large recompete that may be coming up in 2019. Or how would you calibrate the recompete risk outside of LOGCAP in 2019?

Stuart J. B. Bradie -- President and Chief Executive Officer

So, our current recompete win success rate is above 95%. So, we're feeling pretty, pretty good about that. It's a very, very strong focus area for us, of course. And so, we're -- I guess, we feel good about it.

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Yeah. And I would say that recompete is in our logistics business that has had the strongest recompete success rate across our different business units within our GS business. It's a very strong team, very impressive team.

Operator

Thank you. We can now take our next question from Brian Ruttenbur of Drexel Hamilton. Please, go ahead. Your line is open.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Yeah. Thank you very much. So, I've got a couple of questions around the Government Services on the macro side, and just wanted to hear your opinion on government budgets going forward and the sustainability of your growth. So, it appears that people are talking out there from other conference calls are talking about fiscal '20. '19 seems to be relatively set. But I want to hear what your -- you have to say.

And I think that a lot of questions so far have been how sustainable is your growth. Let's just say you get LOGCAP, and we're trying to figure out how fast the industry is going to grow because you're way outpacing the industry growth. So, if you could address the macro and then get into some of the detail?

Stuart J. B. Bradie -- President and Chief Executive Officer

Okay. So, I think you're quite right. 2020 is a little bit uncertain just -- the political situation today. '19 is very firm. We do have a number of what I would call critical programs within our portfolio that probably will not be affected by any slowdown and that those will continue.

And I would also point out that out of our Government Services business, circa $1 billion of it is actually overseas, and it got nothing to do with the US political situation. And that part of the business is delivering the highest margins. In fact, we've talked about this before, the Aspire contract in its own right makes up about 30% of our Government business today. And the margins and the return of capital associated with that are very, very attractive. And that is growing and doing very, very well. So, we're seeing good growth in Australia, double-digit growth. We're seeing good growth in the UK business.

And as Mark said earlier, some significant opportunity coming through into the Middle East via the Ministry of Defense. So, quite we're feeling pretty good about the sustainment of that growth. But you're quite right, there are -- there is -- there are uncertainties around the 2020 funding.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

If I could just follow-up --

Stuart J. B. Bradie -- President and Chief Executive Officer

And I think the key is to win as much as we can in next 12 months and get that under contract, and get programs under our wings, so we can ramp up. Hopefully, as new projects gearing '19 and '20, having those in the portfolio, and then focus on cash flow generation and deploying capital thereafter. A model that's been very successful in the GS business as you've seen over and over again.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

So, just as a quick follow up on that. Do you read anything into the delay with LOGCAP V? It's got delayed several times, I know that you're already on LOGCAP. But I didn't know if there was any reason that you could give on the logic on the delay out to April?

Stuart J. B. Bradie -- President and Chief Executive Officer

I just think it's a big complex change for the Army, and it's just working through the processes, which at times are bureaucratic. So, it's -- with such significant change in scale, and clearly that's what's causing the delay. I don't think there's anything sinister are going to change around it. And so, we -- I think that's all it is.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Okay. And then --

Operator

Thank you. We can now take our next question from Bill Newby of D.A. Davidson.

Bill Newby -- D.A. Davidson -- Analyst

Thank you. Good morning. Congrats on another strong quarter.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thank you very much, Bill.

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Thanks, Bill.

Bill Newby -- D.A. Davidson -- Analyst

Just a follow-up on the Technology business. I guess, another great quarter on margins there. I guess, one just -- I guess, is there any more color on what allowed you guys to outperform that target you set initially this year? And then, two, given the momentum you guys are seeing, is there any reason to think that that's a sustainable number? Is it still prudent to think mid-20s is the right number going forward?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah. It's -- yeah. I think the -- yeah, we have been a bit surprised by the performance in the margins. But I do think it's actually a combination of two things. One is market force, it's obviously, with a heightened activity in the market, you could do a little bit better. But also, I think it's the introduction of some of our new technologies, which are pretty unique and leading the pack in certain areas that's allowed us to perform at those levels.

We do still think mid-20s going into next year, we'll look at that as part of guidance as we get our budget process next year, and just what's in the hopper. But we don't see a slowdown there in the slightest. (ph) And I think the beauty of that business is not only the margins, but the fact that its negative working capital is a terrific business. And the faster we can grow it, the better, as we far as we are concerned. And I think we've got a strong platform to do so. And I think we've got a technology portfolio to do so, which is just as important, of course.

Bill Newby -- D.A. Davidson -- Analyst

I appreciate that. And then, I guess, shifting over to hydrocarbons and just another follow-up on LNG. I guess, just as you're in dialogues with customers and that they're looking at FIDs. How much weight are these guys given to all this tariff noise that we're seeing with China? And I guess, is -- do you see any projects that could be pushed due to that kind of risk and how are these guys thinking about that?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, it's interesting. Magnolia did come out and say that they are struggling to close deals with Chinese off-takers. However, I think there's a fantastic opportunity now, and you saw this with Germany more recently this quarter basically opening up for LNG imports. So, I do think there's probably a higher demand from Europe than expected.

And I think at the end of the day, when you look at companies like Venture Global there, off-takes they've announced though with people like Shell and BP and into Repsol in Spain, et cetera. So, I do think that there are other avenues for LNG off-takes that we're seeing. And of course, the big traders, I guess, the big names in LNG trading are not worried too much about that. So, I think, ultimately, we are not seeing really any negative impact of tariffs at the moment. We are watching it, of course, very carefully.

Operator

Thank you. We will now take our next question from Alan Fleming of Citi.

Alan Fleming -- Citigroup Global Markets, Inc. -- Analyst

Hi. Good morning. Stuart, you talked --

Stuart J. B. Bradie -- President and Chief Executive Officer

Good morning, Alan.

Alan Fleming -- Citigroup Global Markets, Inc. -- Analyst

Good morning. You talked, good morning -- you talked about the Brown & Root joint venture a couple of times in your prepared remarks. Maybe, you can just put a finer point on what you're seeing in that business? How much of the growth there the acceleration is kind of market driven versus you're just putting more of a focus on that business?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah, both is the answer to the question. And it's global rather than just in the Gulf Coast. But just talking about Brown & Root itself, which is focused on the -- in the US and predominantly headquartered in Baton Rouge or around that part of the world. We've grown our business significantly from circa about 6,000 people when we put that joint venture together, and it's up nearly 11,000 people today. So, I think there's been a real sort of focus gone into that business by creating the joint venture and creating an overhead structure that's right for that type of business, and allowing it to flourish in an empowered manner. So, it's been a highly successful transaction.

At the same time, we're seeing shifts globally, where our business in Poland has grown 50% doing industrial services throughout Europe. I was there over the summer. And that's an absolutely terrific business with a technical quality that's unsurpassed in interest. And our business in Russia is doing very well.

And one of the businesses really doing, outperforming well is the one in Saudi Arabia where we worked for an integrated refiner there, and really the first two outsource maintenance program. And we see significant opportunity because we're saving -- we think we're saving them money by the outsourcing process. And, of course, there's a lot more cost pressure and a change happening in the Middle East around that.

So, I do think the opportunities for that business globally to really become a global onshore maintenance provider, which is in essence I think is a bit of whitespace that we want to move into and the one we're going after aggressively. So, I think it's a terrific business. It gives us longevity of contract, strong customer relationships. And that services model allows you to be in the middle of things as planned expansions and CapEx starts to get spent again. So, it is a very important part of the business and one that we're very, very pleased with to-date.

Alan Fleming -- Citigroup Global Markets, Inc. -- Analyst

Okay. And, Mark, maybe I can follow up on the favorable settlement on the unapproved change orders. What does that mean for the balance of unapproved change orders for you? I guess, it'll be around $600 million if you move those, that $330 million from unapproved to approved. Does it -- does that balance kind of more or less sit here until there's a ruling on the deed of settlement or the arbitration with the construction consortium on the power plant? Or can it also kind of continue to bleed down as the project itself winds down? I guess, I'm asking in the sense of, is there an opportunity for you to get any recovery here before 2020?

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

So, if you look at the unapproved change orders and you reduce from that the $330 million that we disclosed today, I discussed earlier related to the 2.6.3, it should clear up that piece of which we've already received the cash. So, that leaves a ballpark $600 million left. And to keep it simple, roughly 50% of that is our claim from the consortium's original subcontractors on the power plant. And we will try to achieve a settlement with them. But it could go through an adjudication process, and that could be a long time. And so, that's ballpark half of the remaining there, and so timing is hard to predict.

And the other half are other change orders, some of which can just be negotiated and hopefully can come down. And one chunk of that is up for another arbitration case that we're working on right now as well that hopefully will turn out in our favor. So, that's how that breaks down.

Stuart J. B. Bradie -- President and Chief Executive Officer

It's probably worth noting that we've got a number of legal cases that are ongoing with -- associated with the Ichthys project. And we've got, obviously, the CCPP arbitration. But we're trying to recover the monies we've spent to finish the power stations from that consortium, which will result purely in a cash upside for us, assuming that, that goes in our favor to some level.

In terms of the other arbitration proceedings that are ongoing, they're all claims that we have made against the customer. So, the only case the customer, at this point, they might bring others, but at this point that they had against the JKC, ourselves and JGC and Chiyoda, the JKC joint venture, was 2.6.3. So, really, from a cash perspective, depending on how these work up, it's all upside and as we look forward.

And that's why my opening remarks were pretty upbeat about Ichthys with the line of sight to the end as we move forward. And these legal cases, we're hoping we don't have to finish them. We're hoping, when the customer now were up producing LNG and that venture starts to get cash as a consequence, we can sit down with the customer and actually conclude a negotiated settlement.

And similarly, we would like to do a separate negotiation with the consortium who -- on the power station. But there is no guarantee with that, but both go into arbitration, when the arbitration is done its binding, and that will be the end of it over the next couple of years. But I think the takeaway in this is that we've got a clear line of sight to the end. We're well-structured in terms of how we're dealing that from a balance sheet perspective. And we'll be set out with the light at the end of the tunnel and finishing that job is there. And it'll be good to sort of get offsite and get that LNG facility producing to full capacity. And then, it's really just an upside in cash as we recover through these -- through negotiations or arbitration.

So, hopefully that takes a bit of uncertainty away from the KBR story, because I do think there's been a level of uncertainty surrounding Ichthys for some time. And I think now we're getting close to the end and have this ruling that removes a large element of that uncertainty.

Operator

Thank you. We can now take our next question from Lucy Guo of Cowen and Company.

Lucy Guo -- Cowen & Company -- Analyst

Hi. Just a quick follow-up on the earlier question about your strategic thinking on the Government Services business, just kind of given what Jacobs has done as well as your own transactions, and kind of industry wide within Government Services, how are you thinking on which maybe set of customer agencies or capabilities where you may still would like to add or bolster?

Stuart J. B. Bradie -- President and Chief Executive Officer

Yeah. I mean, that's a good question. We're actually just going into a strategic process now for next year. But I mean, clearly I think, Lucy, we were probably the leading provider or one of the top two anyway of services to NASA. That's a clear focus. I think, the ability to take that capability and move that into the commercial space arena as that continues to grow and they get into manned space flight is clear. I do think there's a great opportunity to really leverage that into military space in due course as the focus on that with space force, et cetera, continues.

So, I think there's clear opportunity from a strategic upside perspective in the space arena. I think our logistics business is probably leading edge at the moment. So, very focused on that customer base there and I think significant opportunity with LOGCAP V, and just what's in front of us organically. I don't -- we've got that major recompete with what we're focusing on. And I think there that the path is clear.

And we've got some real smarts within that business from a digital platform perspective that's really driving efficiency. So we're -- I think we're forever trying to improve our sort of efficiency and level of service there that really sort of repositions us well for expanded growth on the base operational side as well.

And then, into the engineering platform side, through the Wyle under HTSI acquisition, you are sort of locked into two platforms where you've gotten very strong and deep domain knowledge. And really, our focus is really on those mission critical elements across all of what we do. And we think that's a key differentiator for us. And there's some -- certainly some mission critical platforms that we're supporting around things like PHA, and F-18 and others.

So, I think in terms of adding capability, we do have a very strong mission critical IT platform that we feel we can grow and leverage. And we're doing a bit of work strategically around that today. And we do think there are opportunities in the intelligence side of the business that we would look to exploit. But that's the next wave, if you like. So we -- so, I think there are significant expansion opportunities in front of us. I think we've got enough capability for synergy that we -- that near-term, will grow the business. I think that's a key takeaway. And any future expansion into different areas will be considered along with, I guess, the relative merits of share buybacks and cashback to shareholders.

Lucy Guo -- Cowen & Company -- Analyst

It's very helpful. Thank you very much.

Operator

Thank you.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thanks, Lucy.

Operator

That concludes today's question-and-answer session. At this time, I will turn the conference back to Stuart Bradie for any additional or closing remarks.

Stuart J. B. Bradie -- President and Chief Executive Officer

Thank you very much. Thanks for listening. I think, really, it's a good time -- it's a great time in fact, as I said, to be at KBR. I think we are very much moving along our strategic pathway. I think our strategy is working. I think this is the seventh or eighth quarter in a row where we've delivered and a number of times delivered above expectation and again raising guidance.

So, with that, I'll conclude and I'll look forward to talking to some of you or all of you later on. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 66 minutes

Call participants:

Alison Vasquez -- Vice President, Investor Relations

Stuart J. B. Bradie -- President and Chief Executive Officer

Mark W. Sopp -- Chief Financial Officer, Executive Vice President

Tahira Afzal -- KeyBanc Capital Markets, Inc. -- Analyst

Jerry Revich -- Goldman Sachs & Co. -- Analyst

Jamie L. Cook -- Credit Suisse -- Analyst

Michael Dudas -- Vertical Research -- Analyst

Steven Fisher -- UBS -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Lucy Guo -- Cowen & Company -- Analyst

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Bill Newby -- D.A. Davidson -- Analyst

Alan Fleming -- Citigroup Global Markets, Inc. -- Analyst

More KBR analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.