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KBR (NYSE:KBR)
Q4 2019 Earnings Call
Feb 20, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day everyone. And welcome to the KBR, Inc., fourth-quarter 2019 earnings conference call. This call is being recorded. [Operator instructions] For opening remarks and introductions, I would like to turn the call over to vice president of investor relations, Alison Vasquez.

Please go ahead, ma'am.

Alison Vasquez -- Vice President of Investor Relations

Good morning. And thank you for attending KBR's fourth-quarter and fiscal 2019 earnings call. Joining us today are Stuart Bradie, president and chief executive officer; and Mark Sopp, executive vice president and chief financial officer. Stuart and Mark will discuss highlights from the year, the market outlook our financial results and our 2020 earnings and cash flow guidance.

After these remarks, we will open the call for questions. Today's earnings presentation is available on the Investors section of our website at kbr.com. I would like to remind the audience that this discussion may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements.

These risks are discussed in our most recent Form 10-K available on our website. I will now turn the call over to Stuart.

Stuart Bradie -- President and Chief Executive Officer

Thank you Alison. I'll start off on Slide 4. As many of you know, I normally start off by talking about our safety performance which by the way, in 2019, was again stellar. But today, we want to broaden this a little.

At our investor day in May of 2019, I began the session by highlighting One Ocean, KBR's social outreach program really focused on engaging with local schoolchildren on the use and the impact of single-use plastics. This was designed to give investors a real and tangible example of our sustainability efforts that are making a positive difference. At KBR, we believe that not only in the way that we behave as a good corporate citizen, but also through the work that we do, that KBR has a truly differentiated sustainability opportunity. And so going forward, our desire is to share and highlight more to our stakeholders in this area.

And on to Slide 5. So in keeping with that message, we have broadened zero harm and courage to care beyond safety, as we believe it also captures our culture around sustainability. To be clear, we believe that there is a symbiotic relationship between good business and good sustainability performance. Now looking at the slide, you will see that health, safety and security remain a key component of our sustainability platform as we will not compromise on looking after our people.

But we have also identified a number of social and environmental focus areas for KBR, and we will present on a different one each time, really to try and give you real, tangible things that we are doing as a company that are making a positive difference. As we embark on bringing this together and identifying and collecting all the things we do across KBR, the level of passion and the breadth of what we actually do is fantastic. So I'm excited to introduce our sustainability program today, and I'm looking forward to exploring some of the things we do on future calls. In the meantime, I'd encourage you all to read our 2019 sustainability report which is of course available on our website.

And this will give you a great insight. Now on to Slide 6. When we met in May 2019, we presented a scorecard and we committed to come back and show you how we did. So here it is.

It looks pretty good. But again, as I said in May, the secret sauce they're delivering is really our culture. That's really our 38,000 exceptional people working together for the benefit of each other and one KBR. And I would like to take this opportunity to thank them publicly for all that they do.

I think you're all well aware of the things highlighted, but I would be absolutely remiss if I didn't say this was the 12th quarter in a row of meeting or exceeding expectations. So the key message is that we have, and we will continue to do what we say we are going to do, as we've done for the past three years. One box that is not green is LNG, although we did win and sign an EPC that is yet to FID. But what is becoming more evident as time passes is that the other areas of our businesses are outperforming.

And as such, this is becoming less important to achieving our targets, even upper range, and I'll talk a little bit more about this later. So on to Slide 7 and some key highlights. So going across the top, overall revenue and EBITDA up nicely with consistent margins, really showing our focus on winning the right work and strong execution. The key point to highlight is that all three segments had double-digit growth which in turn of course drove EPS growth throughout the year at or above plan.

True business performance is of course all about cash. And I'm pleased to report that our focus on cash management is paying off big time. NI conversion of 127% speaks for itself. But I can tell you that we are not perfect and we believe there are still opportunities as our processes mature to further improve DSO, and Mark will talk a little bit more about capital deployment and that flexibility in that area a little later.

Now, I know it's all very nice to talk about 2019 or, in fact, the past 12 quarters, but I'm well aware of what people really on their mind today is talking about what we're going to do next year and beyond. And with this in mind and to underpin our continued growth, the book-to-bill of 1.3 times for the year with all segments above 1 is a key highlight, especially given the longevity and the quality of that backlog and the fact it does not include LOGCAP V or Freeport LNG. Now on to Slide 8. The quarter, as you would expect, is very much the same story as the year.

Strong revenue and EBITDA growth, with EPS growing a little bit faster due to some planned tax pickups and a little bit with the resolution of the private security matter which is really mainly a cash upside event as we had booked most of the revenue many years ago. Backlog is in great shape, and the standout for the quarter was technology Solutions doing an amazing job with a book-to-bill of 2.1 in Q4. On to Slide 9. Let's first touch on the outlook for government solutions.

We remain upbeat about the markets we are focused on. Our areas of deep domain expertise, plus our key strategic growth themes of defense modernization and human performance, align well to the recently appropriated 2020 DoD budget and the proposed '21 budget. The largest proposed increase we have seen in recent times to the NASA budget, combined with our leading position in science and human spaceflight, is also very exciting and also aligns with our third key strategic growth theme of space exploration. Internationally, our activity levels and pipeline remain robust.

So when you combine the above with a high level of secured work, and I'd like to point out a very low level of recompetes in the next 12 months, plus layer in LOGCAP V, the outlook is positive and well in line with our 2022 targets. On the energy side, let me first touch on technology Solutions. Many of our technologies line up well with a cleaner future and align with the sustainability program. To pick a few highlights, we have a number of maturing ammonia opportunities, our growing pipeline of K-SAAT, our disruptive alkylation technology opportunities, mostly in North America.

And globally, our ROSE technology prospects continue to look healthy. And when you combine this with a very strong level of work in hand, given the Q4 bookings, technology is very much on track to meet its long-term growth targets. But we do expect a little bit of a slower start to the year given the events in China. With the slowing of the Chinese economy, as you're well aware, LNG spot prices are at very low levels.

As such, with perhaps the exception of the IOC-led projects, we expect that LNG FIDs will move to the right. Midterm supply demand curves do cross, so that market does remain attractive. But in 2020, our guidance factors in the current market softness. On the broader energy markets, chemicals margins have deteriorated, and oil prices are also facing downward pressure, really signaling a weaker capex cycle.

Fortunately, for KBR, we have two things in our favor as we move into 2020. The first is that we have a strong backlog of recently announced and in-flight projects, mostly cost reimbursable that ramp up in 2020 and into '21. And secondly, we have a large sustaining capital business that typically sees increased activity via opex spending as capex cycles down. As such, our targets set in May of last year remain intact.

So all up, our outlook remains upbeat, and this takes us nicely on to Slide 10. As you can see, I would expect our opportunity pipeline remains significant. In government solutions, we are seeing a number of larger opportunities across engineering, space and more recently in the logistics area, both in the U.S. and internationally, that should be awarded in 2020 and could be potentially disruptive.

The energy opportunities are significant and remain so, but we expect awards, particularly in LNG, to move to the right. The histogram on the right has been updated and reflects the work secured to achieve our '22 targets. We have a bit over 67% already in the shop. And when you factor in the smaller, shorter-duration consultancy, program management, IDIQ-type works, this number is a bit closer to 80%.

You'll recall that the lower end of our range included 0 LNG and the upper range factored in just one LNG project starting in early 2020. With the businesses performing, you can see that the required contributions overall from LNG has reduced and in 2020 is quite small. This really demonstrates the transformation at KBR away from their lines on LNG, and future projects truly are the candles on the cake and not the cake itself. And on to Slide 11.

We thought it would be worthwhile to show you the booking momentum and backlog growth to further reinforce what I was saying on the previous slide. I really think the true measure of forward momentum is not simply a single good bookings quarter but a demonstration of winning the right work that delivers true shareholder value over time. This slide shows the consistent performance of our business development teams but also demonstrates the exemplary focus on delivery. You do not win continuous profitable work unless you have a proven track record of making your customers successful.

I'll now hand over to Mark, who will take you through the numbers in more detail, our capital allocation and of course guidance for 2020. Mark?

Mark Sopp -- Executive Vice President and Chief Financial Officer

Great. Thank you Stuart. I will pick it up on Slide 13 which summarizes the fiscal 2019 results. Overall, as you've heard from Stuart, the year progressed and concluded largely as expected, with strong top-line growth, stable margins within our targeted ranges and other items like interest and taxes playing out as we guided.

First, it's great to see how each of our segments contributed to growth during the year, with government solutions providing the initial liftoff in the first half, and technology and energy providing the thrust in the second half. As Stuart said and worth repeating, each segment generated double-digit growth in the year and achieved its targeted margins. The growth reflects winning mostly cost-reimbursable, low-risk professional services across our GS and ES segments; and low-risk, high-margin technology sales in our TS segment. We think this speaks well to our cost competitiveness, the strength of our intellectual property and the effectiveness of our business development organizations.

Another aspect of the year which manifested in business capture and predictable margins, and as Stuart just alluded to, was project performance. Project performance translated to a high recompete and new business win rate which reflects strong customer confidence in our ability to deliver. Execution also enabled us to profitably complete a number of projects, Ichthys being one of them, within previous estimates and with no surprises along the way. Interest expense was up from 2018 as we had expected on higher debt levels, but we've recently taken action to reduce that meaningfully in 2020 which I'll cover here in a bit.

As we guided throughout the year, we delivered some tax benefits in the fourth quarter, mostly comprised of R&D tax credits. This benefited the provision accordingly in 2019 and will translate to real cash savings in 2020. Adjusted EPS for the year came in at $1.69. That's up 10% from the prior year reflecting a combination of revenue growth, constant margins and tax benefits, partially offset by lower equity in earnings from our joint ventures and higher interest.

Operating cash flow is just over $250 million, up almost $100 million from 2018 reflecting operating cash flow to net income conversion rate of 127%, particularly strong given our double-digit top-line growth rate. This primarily reflected our greater focus on working capital management, as we said we would do. We reduced DSOs by four days year over year and continue to operate at a net negative working capital at the enterprise level. In addition, as Stuart mentioned, we did get a nice bump in Q4 from the final settlement and payment of the private security matter with the U.S.

government which is the primary driver for topping our guidance for the year. Cash flow is truly a team sport. We really believe that here, and this year's progress reflects good work by many folks across KBR. With solid organic growth, profitability and cash flow, we improved our return on invested capital by about 1% during the year and ended at 9%, really good progress toward our goal of 12% by 2022.

Now, I'll move on to Slide 14 and start to cover our three operating segments in a little bit more detail. First up, government solutions had another fantastic year with 14% revenue growth, 9% of which was organic. Adjusted EBITDA margins over 10%, and contributed handsomely to our cash flow performance. The segment had a big recompete year in 2019 and finished with a near-perfect track record at 98%, clearly an industry-leading statistic.

Big wins on LOGCAP V, in the marine corps preposition stock program, plus option extensions for the NASA Johnson Space Center Integrated Mission Operations program and also the Critical Mission Systems program all contributed to good earnings visibility for years to come. In addition, GS already won its largest 2020 recompete with the NASA Ames contract award announced earlier this month. In this program, we're performing cutting-edge research and development alongside our colleagues at NASA in the areas of artificial intelligence, knowledge discovery, nanotechnology information processing and more. With this important win, our recompete risk for the rest of 2020 is quite low.

Book-to-bill for GS excluding PFIs, as we've consistently reported, was 1.1 for 2019. And as I said earlier, this does not yet include any value attributed to LOGCAP V as it has not completely come through the protest process. The new business pipeline remains well over 10 times annual revenue. Margins were also strong across the board with solid project execution and highly valued competitive solutions for our customers.

On to technology, Slide 15. Another strong year with organic growth at 26% and margins also at 26%. Revenues in 2019 were balanced across technology offerings in olefins, ammonia and refining, with a fairly balanced mix across license, proprietary equipment, engineering and catalyst categories. The tech team did finish the year with an exceptional bookings quarter in the fourth quarter, Stuart mentioned that earlier, a book-to-bill of two times which certainly provides good momentum as we enter 2020.

Now on to energy solutions, Slide 16. 2019 was certainly an important year of transition where top-line growth was restored and our service offerings in this segment continued to gain scale and geographical expansion. This segment produced 16% organic growth during the year. It also produced double-digit sequential growth the last three quarters in a row, with balanced sales across engineering, feasibility, early stage contracts, project management, reimbursable EPC, maintenance and operation support and consulting engagements.

There are no lump sum EPC contracts in our portfolio today which yields a lower-risk, more predictable, profitable and cash-generative business profile. Book-to-bill is just shy of two times for the year which excludes, as Stuart said earlier, any value attributable to the Freeport LNG EPC opportunity. In sum, we saw strong and balanced performance across all three segments this year, with particular success in protecting the base and winning new work. These attributes bode well to continuing to perform in accordance with our long-term targets.

On to Slide 17, summarizing our capital structure and deployment priorities. More good news here. We set out to achieve meaningful deleveraging in 2019, and we exceeded our goal. Strong EBITDA growth, coupled with debt reductions, brought our gross leverage ratio down to 2.7 at year-end or 1.2 times net.

With Ichthys funding done, strong free cash flow drove cash balances higher at year-end which amplified the net leverage ratio reduction. We were pleased to recently announce the successful refinancing and amendment of our credit agreement, an important element in our long-term capital deployment strategy. Consistent project execution, strong EBITDA growth, predictable cash generation and improved credit ratings allowed us to tap into the debt markets in January, February this year, and we're certainly pleased with the outcome. In connection with the refinancing, we used excess cash to reduce borrowings by about $130 million.

That really helped ensure a successful execution of this transaction. The refinancing provides significantly improved credit terms that will benefit KBR for many years to come, increasing our capital flexibility, reducing our borrowing rate by a full percentage point and extending the tenor by two years. The facilities now expire over 2025 and 2027. We're also pleased to announce a 25% increase in our quarterly dividend enabled by the capital flexibility allowed under our amended financing agreement.

The dividend increase reflects the successful transformation of KBR into a predictable stable generator of earnings and deployable free cash flow and puts our net income dividend payout ratio at about 25%. Our board has also recently approved the replenishment of our share repurchase authorization to the $350 million level that we established sometime ago. We do not intend to commit to or signal planned buybacks which we may undertake absent imminent M&A or other reasons. We accordingly have not factored in repurchases relative to 2020 guidance.

Speaking of guidance, I'll move now to Slide 18 which summarizes our initial guide for 2020. The first point to make relative to our forward expectations is that we affirm the long-term targets announced in the May 2019 investor conference. Those targets, as a reminder, are to achieve a compounded annual growth of 10% to 14% top line, 14% to 18% adjusted EPS both over the 2019 through 2022 period. We also are targeting adjusted operating cash flow conversion of 90% to 110% of net income over this same period, and as I said earlier, a return on invested capital metric of 12% by 2022.

Just a quick word on adjusted cash flow since this is a new term. As we laid out in our May conference, our operating cash flow targets will be adjusted to exclude the benefit of cash flow receipts that would be reported from large project advances and also the reduction of reported cash outflow for the burn-off of such advances as both the receipt and burn-off of advances do not really affect deployable free cash flow. We want to focus, and want you to focus, on cash flow that is truly deployable for obvious reasons. If needing more color on this, don't hesitate to call Alison, who can walk you through this dimension which we think is important to understand.

With the execution phase of Ichthys being complete, the legal costs, settlements and ultimate recoveries will take their course and are of course challenging to predict relative to timing. To improve visibility of our core business performance, we will ring-fence the net effects of legal costs, adjudications and settlements on Ichthys, whether they're gains or losses, and we'll exclude them from our guided EPS. Similarly, our cash flow estimates do not include any effect from the substantial recoveries we ultimately expect to receive as the arbitration and settlement processes are eventually completed. So with those clarifications, we believe our 2019 results are an excellent start toward achieving these long-term goals.

And we also affirm they are not dependent upon winning or executing any lump sum EPC work. We will, however, opportunistically engage in those types of projects only if terms, conditions and pricing meet our risk reward criteria, as this team has consistently demonstrated for some time. For 2020, we are guiding adjusted earnings per share of $1.80 to $1.92 which at the midpoint represents a 10% growth rate above the $1.69 achieved in 2019. As for timing, we expect roughly 40% of earnings in the first half of 2020 and 60% in the second half.

Other than the possible booking of LOGCAP V, we expect light booking activity in Q1, given the strong finish we just pulled off in 2019. Adjusted operating cash flow guidance for 2020 is set at $200 million to $250 million. With that, it takes a little longer this time of year, but thanks for sticking with me through that. Back to Stuart for final remarks.

Stuart Bradie -- President and Chief Executive Officer

Thanks Mark. And I'll take you to Slide 19 on growth and value. So I'll leave you with some key summary takeaways. So starting at 12:00, from an ESG or sustainability perspective, we believe KBR is differentiated and we are leaning forward as we progress our sustainability agenda through 2020 and beyond.

We are well placed, very well placed, in our chosen markets. We have low concentration risk. And our backlog is attractive in its duration and its commercial profile. This underpins the delivery of sustainable growth and achieving our 2022 targets.

The cash conversion profile of our book of business is delivering excellent results and will continue to generate strong free cash flow which of course leads to greater capital deployment flexibility. In summary, as is my norm, I will close by saying it is indeed a great time to be part of KBR. Thank you. And I'll now hand the call back to the operator who will open it up for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question will come from Sean Eastman with KeyBanc Capital Markets.

Unknown speaker

This is Alex on for Sean. I just wanted to touch on the energy solutions margins which came in below our expectation. I'm just wondering if you could provide more color on the quarter and where you expect this to trend throughout 2020 relative to the mid-single-digit guide given in the investor day.

Stuart Bradie -- President and Chief Executive Officer

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

Mark Sopp -- Executive Vice President and Chief Financial Officer

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

Unknown speaker

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

Stuart Bradie -- President and Chief Executive Officer

Yeah, I mean no real update on the appeals process. We've not had, as you have not. I mean the award gets -- the court will come through at the end of February, and there will be a small window for others to appeal between that and I guess the 2nd of March. But they would have to move pretty quickly,you would think.

The army could also choose, whether there's appeal or not, just to progress with the transition. In terms of the transition itself, again, our guide has been quite conservative because it's unclear as to -- yet as to when these task orders will come through and what the transition would look like. I mean the expectation is that it is that perhaps a little bit easier to transition. I mean EUCOM being an obvious one, considering we're the incumbent there, will move a little bit quicker.

And maybe NORTHCOM will move a little bit quicker, and maybe it will be phased in Iraq and Afghanistan. But in truth, and that's why our guide is conservative. We don't know and I mean as we find out more, we'll give you more color.

Operator

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

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. I guess a first question, on the flip side, on margins. The government margin -- solutions margins came in a little better than expectations, and I think, Mark, a pretty nice high for you guys relative to history.

So wondering if there was anything in there, if we can look at the fourth quarter as sort of a higher run rate as we move forward given the mix and portfolio there. And then my second question just relates to Ichthys. Any update on the arbitration timing of any resolution? And then my last question I guess is if we back out Freeport or LOGCAP, how should we think about your book-to-bill for 2020 or your ability to grow backlog? Thanks.

Mark Sopp -- Executive Vice President and Chief Financial Officer

Hey Jamie, Mark here. The government solutions margins are expected to be in their targets for 2020. That's upper single digits, and you know all the reasons for that background. We did have a healthy spike in the fourth quarter primarily from the private security payment that we received in the fourth quarter.

We had a receivable position for a chunk of it that we had not accrued for the interest which came in, in a low double-digit number to the income side. So that was a nice benefit to receive in part in the P&L. And what was really great was the cash collection there was just above $50 million. I said that amped up the fouth-quarter total cash flow.

It's not recurring, but it's in the bank. And that then will be used in our deployment strategy. So we're certainly pleased to have that wrapped up in our favor.

Stuart Bradie -- President and Chief Executive Officer

Yeah. And I think with Ichthys, the arbitration on the power station will proceed this year. We still expect a judgment later this year, Jamie, but there's no guarantee in terms of how long the courts get to decide. But that is still the expectation, and that expectation from previous quarters has not changed.

And yes, that's probably all I can say on that at the moment. And then in terms of book-to-bill going into 2020. I mean I think our pipeline is very robust. And as I said, we're seeing significant activity and bidding activity, particularly in the government solutions side of the business.

And we expect book to bill to grow nicely through the course of the year. On the energy side of the house, I think bookings will be under pressure. And I do think that we'll do reasonably well, given the mix of business that we discussed in terms of the opex and the sustaining capital piece of our business. But I think there will be a slowdown in big greenfield awards.

But I think at the same time, there will be movement in certain markets, depending on the viability of those developments. But it's difficult to assess what those bookings will be through the year. But again, considering we're coming from a reasonably low base, I'll be honest about that I think we'll do pretty well on a book-to-bill basis.

Operator

We'll go next to Steven Fisher with UBS.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning. Just Mark on the 2020 cash flow guidance. Can you help us with some of the reconciling items between earnings and cash flow? I was just maybe a little bit surprised with the earnings being up 10% and cash flow being down at the midpoint.

And I guess if you back out that $50 million of the receivable collection maybe it would have been flat. So I guess earnings up but cash flow kind of flat.

Mark Sopp -- Executive Vice President and Chief Financial Officer

Steve, so you take out the $50 million of cash collect, and we would have finished just a hair above $200 million for fiscal 2019. The midpoint's $225 million, so there's some nice growth there from '19 to '20 on an apples-to-apples basis. Relative to the reconciliation, you've got quite a bit of -- from net income that is you got quite a bit of depreciation and amortization. But we also have a pension obligation of roughly $50 million.

That is a substraction to that and all the rest is timing of working capital. So in a growing business, we do expect to have some investment, if you will, in receivables. But we are working very hard, as Stuart said in his prepared remarks, on DSO reduction. And hopefully we can offset that, and those are the main items.

Stuart Bradie -- President and Chief Executive Officer

I mean I think the cash conversion is well within our guide and around about 100% actually.

Steven Fisher -- UBS -- Analyst

OK. That's helpful. And it sounds like you guys have been pretty cautious with what you have included and assumed in the guidance. Just -- I guess I'm curious.

What are the most important things that still need to happen that haven't yet happened in order to hit the guidance that you have out there?

Stuart Bradie -- President and Chief Executive Officer

I mean I think we've got to continue to execute well. That's a given. I think we have to not get ahead of our skis on cost, and that's a given. But ultimately, Steve, we've taken a reasonably prudent position on -- in the government side, both with LOGCAP V and others.

In terms of -- we've moved LNG out essentially. We're really making very little dollars there in all of -- sorry, in all of '20. So I think, ultimately, that derisks that element. So I think really for us going in with almost sort of 70% work secured, it's really all around execution and making sure that we deliver on the margins that are in our guidance.

And if we do that and with a little bit of success on the programs that we're chasing, we should do well in 2020.

Operator

We'll go next to Michael Dudas with Vertical Research.

Michael Dudas -- Vertical Research -- Analyst

Good morning gentlemen and Alison.

Stuart Bradie -- President and Chief Executive Officer

Thanks Mike.

Alison Vasquez -- Vice President of Investor Relations

Hi Mike.

Michael Dudas -- Vertical Research -- Analyst

Good morning Stuart. I'll get your returns tonight. So first, I'm interested in, I believe, in your prepared remarks, looking at some of the opportunities in your pipeline. You talked about international logistics.

I wanted to see, outside of your U.K. work, some of the opportunities on the government side internationally that can maybe help not only from your embedded work international government side but also your international energy business that's very, very global. That's my first question for you Stuart.

Stuart Bradie -- President and Chief Executive Officer

OK. So in my prepared remarks, I actually talked about large programs that we're looking at in engineering, science and space and more recently in logistics over and above LOGCAP V. That's both inside and outside the U.S. And I mean these are substantial programs that were not named by name at the moment and we'll not do so, but they're in the billions of dollars.

And as I said, if they come through as we expect in 2020, I mean they would be highly disruptive in terms of how we would look going into the end of 2020 and into '21. So quite an exciting time chasing those programs. And I think ultimately, we're a very, very strong company in that arena. And we stand as good a chance as anyone at being successful.

So I think that's been a big move in terms of our opportunity pipeline coming through in the last couple of quarters. And as that start to mature, we're getting more and more excited about it. And I think in terms of the energy business -- yes, sorry, I'll just continue there if you don't mind. On the energy side, we are very heavily focused in key areas.

The Middle East has got a lot of activity regardless of what we're seeing in terms of pressure. That continues to be sort of a hot bed of opportunity. And again, we're very well positioned in Saudi for ongoing work. And in Kuwait, we're seeing quite a lot of activity there and in Oman.

And then outside of that, we're very well positioned in places like Azerbaijan. They continue to invest in their future. And regardless of the downward pressure on oil, they're looking at a long-term view for their economy. And I think we're, again, very well positioned to take advantage of our long-standing position in that country and our commitment to building capability and local content within Azerbaijan.

So I do -- and certainly in Saudi. And so I think that, ultimately, it's about choosing your fights. It's about picking where you're going to spend your bid dollars. And I think if you do that wisely, as I said earlier on when Jamie asked the question, we can do well in a difficult energy market, and particularly given where we are but also coming off the base that we're at.

Michael Dudas -- Vertical Research -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yes, for sure. Definitely coming into the third quarter and again in the fourth quarter on some of these programs. So definitely through the course of 2020, yeah.

Operator

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

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi good morning everyone.

Stuart Bradie -- President and Chief Executive Officer

Good morning Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah. No, good question. And I would just remind you that as I said, I think last quarter, it was interesting that as we progress through the year, the -- at the early part of the year, logistics was the driving growth then it was engineering. In the latter part of the year, it was actually science and space.

So we start to see an uptick in activity and award in the space sector already. We did announce that we had won our largest recompete for the year at -- in NASA Ames. So again, that will be as well for the future. We're very well positioned in office at NASA, particularly in the elements of human spaceflight.

If you can think about where the investment is going and what the political priorities are in NASA, it's really to get people back to the moon and then onwards to Mars. So the Artemis program initially, with a significant increase in NASA's budget, the largest that certainly, I've been aware of in recent times, and the focus very much being on human spaceflight. There's a number of things that are coming through that we're feeling very excited about. It's actually -- it's difficult to sort of put your finger exactly on one program.

It comes through multi-faceted, and we've got a number of existing contract vehicles that allow us to grow without actually having to bid. And so that's why we're excited about it. We've actually got some new programs in -- that we're tendering now and, in fact, we had already tendered last year and still waiting for award in NASA. And we'll start to see them come through in 2020 as well.

So lots of activity there across engineering, across I guess the whole human spaceflight piece and support of Artemis.

Jerry Revich -- Goldman Sachs -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah. I mean I think the budget still needs to get approved. And -- but I do think there's a strong support to do so. And -- but you never know.

It's an election year. So -- but I think directionally, I think that is the way to think about it. Assuming that budget does go forward, you think that we would sort of grow incrementally aligned with the increase in the budget. I mean that's typically how it goes.

And we've done a little bit better than that in recent times. It's growing actually faster than budget increases as we -- because I think we're actually focusing on areas where the spend is actually larger than the overall budget increase. And that appears to be consistent with where the money is being spent into the future.

Operator

We'll go next to Tobey Sommer with SunTrust.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you. Wanted to ask a question about the government solutions business and the margins which were up nicely in the quarter. What is the margin profile of the pipeline and the bid activity? And is there any material change in sort of the contract-type mix that would inform us about the margin trajectory going forward?

Stuart Bradie -- President and Chief Executive Officer

Tobey, no. We've been very consistent on our margin guidance. It's upper single digits. And that's a mix of what we're doing internationally and with the Department of Defense and NASA for that matter all blended.

And we expect that profile to remain consistent. And that sort of supports our long-range targets which again, we reaffirmed.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

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

Mark Sopp -- Executive Vice President and Chief Financial Officer

I think we've had -- out of the last 12 years, we've got a CR in 11 of them I think is the statistics. So we're getting used to that, and we need to plan for that to recur again. I don't think we're smart enough to say whether or not the election helps or hurts that. But we'll be hopeful of a timely budget.

But if it doesn't happen, we'll navigate through the year as we've done often in the past. What's important, as I think we've said a few times, is there is bipartisan support for strong defense spending. The request in the president's budget submission is up modestly for defense. It's up a lot for NASA, as Stuart just said.

And we're confident that a good chunk of that will get through, ultimately, even in the election year. It's just a question of when it gets turned on in the budgeting process. And if the past informs the future, it's probably a CR and it goes into December and January and then we get going.

Operator

We'll go next to Michael Feniger with Bank of America.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Hey guys. Yeah, thanks for taking my question. Just we're nearly two months into the new year and you kind of mentioned the coronavirus. I'm just curious it sounds like you've incorporated it into your thinking for 2020.

Just hoping you can kind of flesh that out. At least where exactly are you thinking the hit would be if there is the impact that you're seeing already to maybe a slower start in Q1 with bookings or on the revenue side with you facing some tougher comps maybe? I'm curious to how you guys are incorporating that type of risk right now into your 2020 thought process.

Stuart Bradie -- President and Chief Executive Officer

Yeah. So the main activity for us in China in terms of direct activity as it relates to our technology business. But we had such a strong bookings quarter in Q4. And a lot of our activities, as I said, is also in North America with the sort of technologies that's changed I guess the geographical mix a little in that business.

We're not insulated but we're more insulated than we were. We do think that the bookings in technology, as I said, will be a little bit slower in the first quarter as a result of that and even sort of progressing to what that's ongoing there is going to be impacted. That's just a fact. And so that's why we said we'll have -- I guess we expect that to catch up.

That's why we had a 40-60 split first half, second half. In terms of the rest of the business, as I said, I think for the rest of our energy business, the work that we have and the inflight projects keep us somewhat insulated from the -- I guess the downward pressure on LNG price and things like that. So we're in very good shape there. And I think the effect on the government side is not really there at all.

And I think the other thing to keep in mind is that we are going in with 70%, 7, 0, of work secured, and that doesn't include the small stuff that we don't know about. So I think 70% of our work in hand going into this year. I think we were at 60%.

Alison Vasquez -- Vice President of Investor Relations

Mid 60.

Stuart Bradie -- President and Chief Executive Officer

Mid 60s last year. So a little bit more of a conservative position given some of the volatility in the world. But I think it's -- we're in pretty good shape and pretty confident of achieving a double-digit growth.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

That's helpful. And just the dividend increase you guys announced, just in context of how we should be thinking about M&A. There was a big asset out there. It seems like the company took a very disciplined approach.

So how should we view the announcements today with the dividend and the share repurchases in context of the M&A pipeline? Is there anything transformative out there? Is -- are you guys kind of moving away from possibly those type of big transformative deals? Really focusing on what you guys have now with your platform and ability to compete in some of these bigger projects in government.

Stuart Bradie -- President and Chief Executive Officer

Yeah. So you're quite right. We've got a very healthy pipeline. We've got double-digit organic growth.

So we don't have to rush to the finishing line and overpay or get deal fever. As we say, we're very disciplined in our approach. In terms of the way to think about the dividend and the share purchase authorization, I think you should be really excited about it. I think it's a clear signal in our belief of the future.

It's a clear signal on the cash-generating qualities of the business. And I think it demonstrates our confidence in tomorrow. But it's -- but it doesn't distract from our opportunity pipeline and M&A either. We've always said that if we can find strategic and accretive M&A that really sort of move the needle or takes us into new areas or with new customer sets, go up the value chain, then we would look at it very, very seriously.

But we won't overpay. We won't get sucked into that debt spiral. We're very clear about what we want and we're very clear that we're not going to let our desire to get there run away with common sense. And so far, I think we've demonstrated that.

You're quite right. We had a lot of discipline around the looming asset. And we clearly -- we felt that that asset was -- to us, it was less valuable than others. And we're going to continue that way.

But there's quite a lot of activity today in the M&A space. You've seen a lot of deals in those, particularly in the government solutions arena. And if we can identify something there that keeps us within a sensible leverage ratio that is strategic and we can get it for something in a way that's accretive, then yes, we'll certainly go after it. So I don't think you should be taking the dividend or the share repurchase authorization as a signal that we're not doing M&A.

You should take it as a signal that we're very confident about the cash-generating qualities of the business. And we've always said our future and this target -- the long-range targets included the deployment of some of that cash.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Thank you.

Mark Sopp -- Executive Vice President and Chief Financial Officer

But the 2020 guide does not -- yeah, yeah so other than the capital we've already deployed for the refinancing I mentioned earlier. Other than that which we baked into lower interest expense going forward, we still have some excess cash after that transaction. We will generate more during the year. I think an important takeaway is how that cash is deployed as all upside relative to our performance.

And the flexibilities we have in that deployment have been expanded through the amendment I discussed earlier.

Operator

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

Brent Thielman -- D.A. Davidson and Company -- Analyst

Great. Thanks. I think most of the questions have been asked. But maybe, Mark, just to clarify on the guidance.

It sounds like you factored in sort of a flat run rate of contribution from LOGCAP V this year until you get more clarity, is that right?

Mark Sopp -- Executive Vice President and Chief Financial Officer

We have been conservative. We have a slight uptick but it is a conservative number, particularly compared to some of the data that's out there from '18 -- sorry, '19, '18, '17, on contractor activities in those areas. But due to the uncertainty in timing, due to the transition period, we have been very conservative in the activity levels and the timing of taking over that larger scope, given we just don't have perfect clarity from the customer and the court on when that will all occur.

Brent Thielman -- D.A. Davidson and Company -- Analyst

OK. And then the cost that you're adjusting out associated with Ichthys correctly creeped higher in 2020 relative to what you had in 2019. What's driving that? And kind of how should we think about the cadence of that through the year?

Mark Sopp -- Executive Vice President and Chief Financial Officer

Good question Brent. So half of that number is the exact same amount that we put in the '19 adjustments for the incremental interest between '18 and '19. So we wanted to flatline, if you will, the P&L effect from '18 and not have that be a headwind or tailwind in '19. So we equalized '18 and '19 with that adjustment last year which was about $0.06, I think.

But the other half this year is the legal cost that we will be incurring to pursue our arbitration and other adjudication processes associated with both the client and the parties that were our previous and subcontractors. So it's 50-50 incremental interest from '18 to '19, repeated again in '20 because the debt is still there from those investments, if you will, and then the other half being legal cost to hopefully bring home our recoveries either in '20 or beyond.

Stuart Bradie -- President and Chief Executive Officer

I mean -- I might add Brent, I mean the recoveries -- potential recoveries are substantial and certainly worth the investment in legal fees to do well there. And also, if we -- if we do well in the recoveries, we'll adjust that out as well. I mean that will be a good cash infusion to the business. And I'm sure we'll get lots of help with what to do with that cash.

But in terms of the P&L impact, I mean any upside or downside, but any upside as well will be adjusted out so you can see the true underlying performance of the business. There's nothing opaque about this. We're trying to be as clear as possible. We don't know the quantum nor the timing, so it doesn't really reflect the true underlying performance of the business.

And as we start to recover obviously that will offset and more than offset any investment in legal fees.

Brent Thielman -- D.A. Davidson and Company -- Analyst

OK. Thank you.

Operator

We'll go next to Gautam Khanna with Cowen.

Stuart Bradie -- President and Chief Executive Officer

Hey.

Gautam Khanna -- Cowen and Company -- Analyst

So I had a couple of questions.

Stuart Bradie -- President and Chief Executive Officer

Hey Gautam.

Gautam Khanna -- Cowen and Company -- Analyst

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

Mark Sopp -- Executive Vice President and Chief Financial Officer

I'll pull that up. I can tell you, the full year was 22%. That was just a tad below what we had expected at 23%, 24%. We ran higher than that during the year.

But we were very clear we expected these benefits to come in. And we are working on the R&D tax credit all year and fund that up in the fourth quarter. And so that is a discrete item that has important benefits to the company including cash that we'll bring in next year. In terms of the effective rate in the fourth, well, it was pretty much zero on the face of the P&L.

I mean there's a credit of one in the provision from the fourth quarter, so call it zero.

Gautam Khanna -- Cowen and Company -- Analyst

OK. Fair enough. So it is as it appears. And then why does it rise from the 25% to 27% next -- in 2020 from what you had anticipated this year to be -- the prior year to be which was 23% to 25%? Is there something about...

Mark Sopp -- Executive Vice President and Chief Financial Officer

The main reason is -- well, we have to be cautious in jurisdictional mix, and so that's why there's a range there. But the main reason why there is after the R&D tax credit and uptick in the rate is the effects of the Tax Reform Act of 2017. There are facing elements of that legislation that are mostly around making certain forms of compensation not deductible. And so that creeps in on a per-year basis, and there are some headwinds there in 2020.

There may even be a modest piece after that in 2021 and then it should stabilize. I will point out that we are fortunately not subject to base erosion tax, otherwise called BEAT. So we've navigated around that, so that's not hitting us. But it is that modest creep.

And hopefully, we'll see jurisdictional benefits over the course of -- longer term that will work that rate down. We're certainly working hard on that.

Gautam Khanna -- Cowen and Company -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

I think that's right, Gautam. I mean typically there's are rushers in Q3 before they -- more people get their -- all their budgets up. But yes, Q2 -- it will be weighted heavily in Q2 and Q3. With the exception of LOGCAP V, of course.

LOGCAP V comes through as -- and gets -- actually, they move forward with the transition. We'll know more about the task orders and those will get booked in -- obviously, in Q1.

Gautam Khanna -- Cowen and Company -- Analyst

Got it. But that's not in the $9 billion figure presumably, right? That's an ex-LOGCAP?

Stuart Bradie -- President and Chief Executive Officer

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

Gautam Khanna -- Cowen and Company -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yes. It's new-new. And so that really sort of underpins incremental organic growth on -- so again, that's why we're very excited about the future. I think with a low recompete rate, a strong execution performance and the fact that we've -- I think we've got a fantastic business development function.

I, really do, I think that we'll do well going into 2020 and beyond.

Gautam Khanna -- Cowen and Company -- Analyst

And then one last one on that. So it shows 110 pursuits over $100 million, and I presume that's speaking to most of the pipeline, so positioning versus approval, etc. But are there any needle moving...

Stuart Bradie -- President and Chief Executive Officer

Yeah, yeah. Of course.

Gautam Khanna -- Cowen and Company -- Analyst

OK. Are there any needle moving individual contracts you're pursuing? Any $500 million-plus type arrangements? And then lastly, the Tyndall headwind that we've talked about, the $150 million in 2019 that's nonrecurring. What are the offsets that you might have to grow on top of that, so it's not completely a headwind.

Stuart Bradie -- President and Chief Executive Officer

Yes. I mean it's again -- so to answer your question on significant pursuits, the answer to that question is yes. We have, I don't know, over a dozen, I would say, across the businesses that are over $500 million -- or more, in fact. So I think we're feeling, again, pretty good about that.

And in terms of the Tyndall headwind, you're quite right. I mean our top-line growth is still good in GS and positive ex Tyndall and -- sorry including Tyndall, and ex Tyndall, very much in line with our long-range targets. In terms of offsets, it's interesting. As part of the NORTHCOM award, we do all the disaster relief work for the army.

And so we don't know about that today. And it's -- but there may be opportunities associated with disaster relief going forward and not just this year but recurring for the remainder of LOGCAP V. So we -- again, we don't know about those but they could be strong offsets to that.

Gautam Khanna -- Cowen and Company -- Analyst

Yeah. That's very helpful.

Mark Sopp -- Executive Vice President and Chief Financial Officer

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

Gautam Khanna -- Cowen and Company -- Analyst

Thank you very much guys.

Operator

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

Chad Dillard -- Deutsche Bank -- Analyst

Hi good morning guys.

Stuart Bradie -- President and Chief Executive Officer

Good morning.

Chad Dillard -- Deutsche Bank -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah, I think in my prepared remarks, Chad, we're quite clear that the sustained capital piece of the business was about half of our EBITDA in energy solutions, and we expect that to continue. We're not seeing any slippage in any of what we're chasing on the maintenance side and that activity levels remain. And so we're feeling, again, quite good about that in terms of our chosen markets. I don't know where you're hearing about maintenance activity slipping to the right, but certainly, we are not experiencing that.

And again, I think the beauty of those sustaining capital programs, they're underpinned typically with long-term contracts. I think you've heard me say publicly that our average relationships in our maintenance portfolio is 14 years. So I'm very, very akin to I guess government contracts typically cost plus, longer-term relationship based. And once you establish yourself, reasonably good from a cash perspective, not quite as good as downward but good.

So yes, we're feeling pretty good about that. And I don't think it's weighted one way or the other because of the nature of the contracts.

Chad Dillard -- Deutsche Bank -- Analyst

Great.

Mark Sopp -- Executive Vice President and Chief Financial Officer

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

Chad Dillard -- Deutsche Bank -- Analyst

Great. Thank you very much. That's all for me.

Operator

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

Unknown speaker

Hi. This is Andy Lee on for Andy Klapowitz. Thanks for accepting me. I just have one question on the ES segment.

In terms of -- you already talked about projects being pushed out to the right. But can you just talk a little bit about the terms and conditions of the projects and if you expect to see any improvements in 2020?

Stuart Bradie -- President and Chief Executive Officer

Yeah. That has to be a balanced answer I'm afraid. I think as we're heading through '19, certainly the competitive environment in LNG was changing in the favor of getting better and more sensible terms. And I think that position still retains today.

But we've seen it before. And as the market gets softer, client behavior changes. And maybe some of our competitors will do something silly. They've done it in the past.

Hopefully, they won't do it in the future. And -- but that's what happens, and people will take advantage of that. So I think today, it's still a very attractive environment. But if I think the softness continues for a long time and people get desperate, we will not.

But if people get desperate, perhaps that dynamic will change somewhat. So again, it's a bit of a balanced view but this is as honest as I can be.

Unknown speaker

OK. Got it. Thanks.

Operator

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

Stuart Bradie -- President and Chief Executive Officer

OK. So to close, 2019 was -- it was a great year for KBR. And really, in 2020, I think we're very well positioned for continued double-digit growth and of course associated strong cash generation. I think the dividend up 25% and we talked about this on the call.

It's a clear indication of our confidence in our long-term sustainable growth and performance. And I'd just like to close by saying we retain and remain confident of delivering our 2022 targets. We're very much on track to do so. I think we've performed at and above expectation.

We said -- we've done and said what we're going to do and then delivered it against it. And that's certainly our modus operandi going forward. So -- and I think this is all underpinned not by a finger in the air or a wish. It's actually underpinned by actually very strong level of work in hand.

And the quality of the earnings and the associated cash flow with that work in hand is very, very attractive and gives confidence to stand behind those targets. So with that, I will close and say thank you, again, for your interest in KBR and for joining us this morning. Thank you.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Alison Vasquez -- Vice President of Investor Relations

Stuart Bradie -- President and Chief Executive Officer

Mark Sopp -- Executive Vice President and Chief Financial Officer

Unknown speaker

Jamie Cook -- Credit Suisse -- Analyst

Steven Fisher -- UBS -- Analyst

Michael Dudas -- Vertical Research -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Brent Thielman -- D.A. Davidson and Company -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

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