Kbr, Inc. Q3 FY2020 Earnings Call

Good day, and welcome to KBR Third Quarter 2020 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 the introductions, I'd now like to turn the conference over to Alison Vasquez. Please go ahead.

Thank you. Good morning and thank you for attending KBR's third quarter 2020 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 provide highlights from the quarter, a market update and present our updated 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.

Thank you, Alison, for another perfect lead-in. And thank you all for joining us this morning. I would like to start on slide 4. You have seen our sustainability platform before, so nothing new here. This has now been rolled out globally under our expanded Zero Harm Courage to Care branding, and I'm very pleased to report that the take-up across the organization has been way above expectation; huge enthusiasm. At KBR, we kick off every meeting with a Zero Harm moment that focuses in on one of the 10 pillars. This really allows our people right across the organization to promote and educate others on what they are particularly passionate about or what is directly relevant to them and their business today. From an ESG perspective, this has really facilitated a cultural shift maturing KBR towards a far more aware, responsible, and sustainable company, which takes us nicely on to slide 5, really covering mental health and fitness. This is a really important topic today, as I'm sure you're all aware, particularly with COVID-19 and the associated potential isolation, I guess the different pressures this creates for some perhaps working from home with home schooling. People are experiencing some burn-out, et cetera, which of course, can increase the general anxiety and, of course, stress levels. So at KBR we formed a global mental health and well-being task force. This is led by Jenni Myles, our Chief People Officer, to ensure our people are supported in these uncertain times. As you can see, our strategy focuses on creating a positive culture and equipping our people with the knowledge, awareness, and the resources to ensure that together, we're all focused on both mental and physical fitness. Personally, I really like thinking about mental fitness similar to how we think about physical fitness. There are times when we all feel fitter and times when we all feel less fit. I think this approach really destigmatizes mental health and recognizes that we're all on the curve; our objective is to improve mental fitness just like we typically want to improve our physical fitness. We're also looking at KBR because we have some really strong in-house capability. A couple of weeks ago, our people organized a global town hall with experts from our POTFF program to talk about the work they do to support mental health and fitness for the U.S. special forces. They shared practical tips and advice on ways each of us can also maintain a healthy balance, and it was really rewarding to see the level of engagement across the globe for our leading health and fitness experts to add value internally as well as the great work we do externally. On to slide 6. We're going to start with some third quarter key takeaways. KBR continues to prove resilient in these volatile and difficult times. Our strategy of moving upmarket into higher-end offerings is really paying off. The growth and momentum in our space, human health performance, technology, science and cyber, and high-end technical defense engineering businesses is clearly evident this quarter, which aligns well with the introduction of Centauri to the KBR family. I would like to formally welcome our new colleagues as we closed that deal on the 1st of October. Our people do an absolutely amazing job, and they truly deliver operational and execution excellence. Their commitment to the wealth mission is unwavering. From a numbers perspective, this is reflected in the margins. Without exception, this quarter all segments met or exceeded EBITDA margin targets— a terrific result. Earnings and cash were once again strong. We have great momentum across the business, and the robust book-to-bill, particularly in GS and TS, will help ensure this momentum and our resilience continues. Our year-to-date performance combined with closing Centauri on the 1st of October allows us to raise EPS guidance. Once again, our teams across the world knocked it out of the park on cash, so we'll also be increasing our cash flow guidance. More on this later from Mark. Coming out of the gate in Q4, post-funding Centauri, our leverage is kind of at the bottom of our range. Thus, our balance sheet strength combined with our attractive risk profile and solid book of business gives us deployable optionality. Now on to slide 7. This is our strategic model. It's the same one we presented at our Investor Day in May 2019. It seems a long, long time ago now, especially with all that has happened this year. We felt it might be useful just to refresh people's memories. In short, our people are at the center of everything we do and who we are. The quality of talent, the culture of collaboration, team ethos, and mission focus is very powerful and hugely uplifting. Our core business remains robust, as you've seen, resilient, and we have attractive long-term contracts and strong domain expertise in solid areas of the market that will ensure this continues. Our growth factors on strategic themes remain intact. I think this is important; our strategic discipline is essential in volatile times. When we presented the Centauri acquisition, the strategic fit and alignment to defense modernization and space superiority should have been clear. We continue to move upmarket, with our future focus on attractive and well-funded end markets. The takeaway here is that our strategy remains valid, and we are executing that strategy. As you can see from the wheel, the balance across our areas of focus is absolutely terrific, giving access to multiple funding streams and customers across the globe. Our customer base today is around 80% government and 20% commercial. The risk profile across our business is consistent, and it really delivers more predictable earnings and, of course, excellent cash conversion as we have demonstrated. We are well positioned and continue to secure work in attractive end markets that support continued growth. So, let's now have a look at the market drivers and our key end markets. On to slide 8. We start off with space and mission solutions. The growth in this segment year-on-year has been terrific. We've seen attractive on-contract growth as existing programs performed well across both NASA and DoD. As you can see on the right, we continue to win contracts to perform high-end IT and data analytics solutions. Space and mission solutions is about a $1 billion revenue business, and thus having a backlog of $2.3 billion sets us up well for the next few years. From a market outlook perspective, much like we saw in the cyber domain, we continue to see greater collaboration across space. Our position within NASA and our presence via Centauri and military space and intelligence aligns well. Our human health and performance contracts for NASA and the special forces fit within this business, and we believe this is also a strategic growth factor for KBR going forward. On to slide 9, defense systems engineering again shows double-digit growth year-on-year, a brilliant book-to-bill in the quarter, and all in really high-end technical areas. You can see a few highlights on the right: R&D on next-gen electronics, systems engineering for unmanned naval warfare, and R&D for missile systems. This is high-end work for emerging defense modernization needs. As we've explained before, this is a business that thrives on IDIQ contracts via customer intimacy. Lots of smaller scale, but limited competition pursuits and projects. Very few protests as a consequence; the annual revenue is again about $1 billion, and the backlog of $2.1 billion sets us up well going forward. From an outlook perspective, the near peer threats are not going away and are arguably increasing. We are lined up well opposite national security priorities, and this is enhanced of course with the introduction of Centauri. To be clear, the numbers and the contract wins on this slide are only for our existing defense system engineering business and do not yet reflect Centauri. On to slide 10, logistics. This I think is our least understood business area within KBR. The investment community tends to relate what we do here holistically to what KBR was doing back many years ago in the Iraq War days. The shape of this business is very different today. The focus is much more on recurring readiness and sustainment activities funded by O&M budgets. Through this, we've seen a major reduction of business mix funded by OCO. Our book-to-bill in the quarter of 1.4 was very pleasing and supports continued momentum in the readiness and sustainment areas. Our recent UAE BOSS win is not yet reflected in the backlog. You can see this on the right-hand side—modernizing and upgrading automated fuel handling systems, increasing the volume as we transition onto NORTHCOM; both of these are about readiness training, et cetera. The long-term contracts in Saudi, Europe, and Djibouti are focused on smart digitally enabled sustaining activities. The outlook for KBR is far more predictable as we have transitioned to more O&M funding streams. The complexity has increased, which fits our capabilities with the changing supply chain environment and the demand for more efficiency and predictability via digitalization. Troop levels have and could likely continue to reduce in the Middle East, which impacts our level of effort, but our proportional exposure to this has significantly reduced as highlighted earlier. The margins associated with this business are in line with our overall outlook and not at the low end, as you may presume. The revenue of this business for KBR is just over $1 billion, and again the backlog and strong bookings sets us up well for the future. On to slide 11. Our international GS business is a clear differentiator and is just under $1 billion in revenue. As you're aware, the business is underpinned by sizable very long-term, high-performing PFI contracts, which is reflected in the backlog. A very strong predictable and resilient business, which I think is important as the U.K. manages through not only the challenges of COVID, but also Brexit. In Australia, defense spending has actually increased recently as the Australian government looks to advance economic recovery while modernizing its defense forces. Our business is at the forefront of software development and implementation, from mission planning to virtual and augmented reality, sustainment, systems engineering, and naval training. The growth year-on-year in Australia has been impressive, and recent wins set us up nicely as we move into next year. Now on to slide 12. With our announced exit from lump sum EPC, including direct hire construction, and our exit from low-margin commoditized services, we will concentrate on the realigned technology solutions. As we stated previously, we forecast this business to be around $1 billion in revenue in 2021, with an overall margin in the mid-teens, and we reaffirm that again today. The heritage IP technology area of this segment continues to deliver remarkably strong margins this quarter and had a book-to-bill of 1.3. With this positive booking momentum, margin performance, and a combined backlog of $1.9 billion, we feel increasingly positive about our strategic shift and realignment to more higher-end technology-enabled services. We're also well advanced in removing significant overhead costs. From a market perspective, the drive to lower emissions, product diversification, energy efficiency, and more sustainable technologies and solutions is clear. The demand for our technologies across ammonia for food production, olefins for non-single-use plastics, and refining for product diversification and greener solutions to meet tighter environmental standards continues. A strategic shift into IP-enabled maintenance is also gaining traction, and we continue to see increasing activity across our advisory portfolio, especially in energy transition. We've highlighted some recent successes on the right to demonstrate this. On to slide 13. In summary, these market dynamics culminate in a very healthy pipeline for KBR, with significant pursuits distributed across our portfolio. As we've mentioned previously, 2020 and 2021 are low recompete years, enabling increased focus on winning new business. The team is laser-focused on this objective. We have almost $20 billion in pursuits that will be awarded over the next six to twelve months, which is roughly three times our annual revenue run rate—a very healthy metric indeed, and this excludes Centauri, which we'll add in the fourth quarter. So in short, it's all good. I will now hand over to Mark, who will walk you through the numbers in a little more detail.

Terrific, and thank you, Stuart. I'll pick it up on slide 15, which lays out our key financial performance metrics for the quarter. Overall, as Stuart summarized, the business is tracking on or ahead of plan on each of these key metrics. Our people, our strategy, and our balanced portfolio of businesses have collectively shown resiliency and predictability in the current environment, enabling scale in the business, healthy profitability, strong cash flow, and continued bookings which support growth targets going forward. Revenues have grown remarkably well in our higher-end solutions and services in our Government business that Stuart just summarized. This is offset by some reduction in contingency support, driven by changes in military OPTEMPO in select areas. This shifting mix to more upmarket work is good for our business, as these areas are more consistently prioritized and funded and hence less volatile. On exiting commoditized energy, we are seeing measured reductions in revenues as expected primarily from the derisking changes we made in our Energy business earlier this year. This is also good for our business as we shift to a greater mix of higher-margin technology-led solutions. As you see, profitability is consistent year-over-year at 9%, with annualized EBITDA running at about $500 million. This scale of profit in low-risk, well-demonstrated business areas bodes well in our recent credit offering and credit upgrades. Incidentally, this 9% is consistent with the 2021 outlook we recently gave with the Centauri acquisition announcement back in August. Adjusted earnings per share was $0.44 for Q3, and most non-operating items were pretty much consistent with expectations. Cash flow was really good again in Q3 at $90 million, representing continued strong income to cash flow conversion. Adjusted year-to-date op cash flow is approximately $270 million, which now exceeds the total result we had last year and is the basis for the bump-up in guidance that I'll cover here in a moment. All segments are contributing nicely to strong cash flow processes, and of course, the results you see. We complemented all of this with good bookings across the business both in quantum and in quality for the quarter, with a book-to-bill exceeding 1.0, rounding out a nice balance across project execution, profits, cash flow, and winning new business for the future. On to slide 16 for segment results. Government was up slightly over last year, as Stuart said, with double-digit growth in both space and defense systems engineering; the offset again being the contingency component of logistics. The main driver for the contingency logistics offset has been lower levels of troops in the Middle East and delays in our transition to Afghanistan under LOGCAP V, due primarily to the COVID situation. However, the northern command component of the LOGCAP V win is ramping up nicely. Furthermore, most of our work in NORTHCOM is funded out of the O&M accounts of the DoD, just like Stuart indicated earlier, and this is important as these activities are part of the baseline defense budget and thus more stable and predictable. Moving over to technology. Tech had a great quarter of new bookings and deliveries, with a high concentration of license mix in recent wins. This led to significantly better margins this quarter in contrast to a higher mix of proprietary equipment sales in Q3 of last year. That drove higher volumes but lower margins last year, as you might recall. Energy is transitioning and performing as planned. We are gaining traction with our advisory tech-led industrial solutions and high-end professional services offerings here and are posting nice margins as well. At the same time, we are ramping down the commoditized activities and overhead costs in accordance with the decisions we made earlier this year. These elements working together delivered modest profitability in Q3 as we have managed through this transition and in accordance with how we've guided. As Stuart mentioned, our outlook for new tech solutions in 2021 is roughly $1 billion in revenue with mid-teen EBITDA margins. You can see the progress we have been making toward this goal right here on this chart. The combined EBITDA of TS and ES this quarter was $37 million, which is about $150 million on an annualized basis and right in line with the 2021 implied profit outlook. This reflects the attractive profit production in our heritage tech solutions business, the profitable synergistic elements of the ES business that we are transitioning over to TS, and the significant overhead cost reductions we have been making. That wraps up my comments on a good stable quarter plus the progress we have made in reimagining tech solutions, and we'll move on now to slide 17. Here are just a few points on the Centauri transaction. Just reiterating Stuart's earlier comments, we are super excited about the strategic and cultural fit we are seeing with this business. The integration efforts are already revealing remarkable areas where our combined capabilities can generate value for our customers, KBR, and of course also for our shareholders. The acquisition catapults KBR to a leadership position serving the military and intelligence communities with leading space and other higher technology sticky offerings that directly enable some of the higher-priority national security programs today. These same areas are highly synergistic with our leadership position at NASA and its connections with the commercial space community, particularly as all of these areas together form vital components of the integrated U.S. Space Force strategy going forward. We closed the transaction on October 1, the first day of course of Q4 and completed the associated financing transactions with excellent terms and rates. One of the financing elements of the bond offering closed in late September and did cause a bump-up in our reported cash and debt balances at the end of Q3. That will, of course, all true up with the full transaction effects in Q4 that you'll see in a couple of months. As we will have one full quarter of 2020 with Centauri, we are bumping up our EPS and cash flow guidance to reflect this inclusion together with the incremental financing costs going forward. I'll hit more of that in a moment. Consistent with past practice, we are excluding from adjusted EPS guidance the one-time deal costs and the ultimate non-cash amortization expense for purchased intangibles, which will be determined later this quarter. Now on to slide 18. Here I'll reiterate the overall capital structure for KBR today is excellent, and this enabled the Centauri acquisition at an opportune time which also leaves us in a strong liquidity position after completing this deal. Post-Centauri, our leverage is at the low side of our targeted net leverage ratio. This, coupled with predictable and attractive future cash flows, allows for ongoing capital deployments. Our priorities are unchanged, including deploying excess capital in this regard. And finishing up on slide 19, we have performed at or above expectations in and through Q3 this year, particularly in operating cash flow. We now have Centauri for the fourth quarter, which is expected to be accretive to adjusted earnings and cash flow in line with what we announced back in August. We are raising adjusted EPS guidance to $1.60 to $1.80 and raising adjusted operating cash flow to $270 million to $290 million. That sums up the financial picture. Now back to Stuart to finish up his remarks.

Thanks, Mark. Brilliant. I'll move on and finish up on slide 20. Another strong quarter across all key metrics: earnings, cash, book-to-bill, and margins. I think the year-on-year growth in high-end differentiated areas that sit opposite national security and defense priorities with strong bipartisan support is terrific, and Centauri is clearly additive to this. We gave you color on the backlog and outlook across the different areas right across our business that are extremely well balanced, well positioned in attractive markets, and have a robust pipeline to set us up well going into next year and beyond. Post Centauri, as Mark described, our balance sheet is healthy, and we have retained deployment optionality. When we announced the Centauri deal, we gave you a 2021 pro forma outlook. Over 80% of our customer base would be government and 20% commercial. At a group level, we'd be heading towards revenues of around $6 billion with group EBITDA margin circa 9%. As Mark said earlier, this margin is in line with what we achieved this quarter. Centauri now is obviously closed. The new TS is well advanced with a clear line of sight to deliver as we have stated. With our strong bookings momentum and continued strong operational and execution performance, although this is not formal guidance as this comes out obviously for 2021 next quarter, from what we know and can see today, the outlook we gave you with the Centauri acquisition holds. Thank you for listening, and I will now hand it back to the operator who will open the call for questions. Thanks.

Thank you. We will now take our first question from Jamie Cook from Credit Suisse. Your line is open. Please go ahead.

This pertains to the Government Solutions business. Understanding the backlog has been there and the market outgrowth that you guys have talked about on the slides appears robust over the longer term. The organic growth of the Government Solutions business over the past couple of quarters on the top line has been a little lower than expectations. Understanding some of the things that you pointed out in the slides, do you view the organic growth trajectory of the Government Solutions business—should we expect it to sort of accelerate from here, or how do we think about that over the next sort of 12 to 18 months? And then, the ability to harvest potential upside on margins? Thank you.

Thanks, Jamie. I think this is a real good news story. If you look at the actual mix of how the revenue has flowed through, as I mentioned before, the logistics business has been a little bit misunderstood. I think its exposure to OCO funding, which is more volatile, has obviously played on people's minds. As you've seen through time, as we change the business mix at KBR, our exposure to OCO has changed significantly. The organic growth coming through in our science and space business and our systems engineering business is fantastic. You can see that in the numbers we presented. That mix and that growth in that area of business has really offset any potential reduction that we've had with troop levels coming down in the Middle East. At the same time, we've actually transitioned onto NORTHCOM, which is around operations and maintenance funding, as Mark said. So again, far less volatile and far more predictable going forward. This is quite a significant shift. We'll give a bit more color on the quantums around that shift into next quarter, but it’s really, really good news. I think the growth momentum we have in our high-end engineering and space and science businesses is evident, and we expect that to continue. The pipeline backs that up, and then you have the introduction of Centauri coming in. I believe there are synergy opportunities there that are likely more than we envisioned going into this deal. So, all of this bodes well for the future. Jamie, I think we will be talking about overall growth going forward—organic and acquisitive, of course—but it all culminates in an overall growth narrative that really supports the strategic shift upmarket. You're seeing that come through now in the numbers.

I guess, Stuart. And then one more question, just on the Technology Energy Solutions business on a go-forward basis. I get a lot of questions from investors who think about this portfolio sort of in a traditional energy focus relative to maybe greener energy or energy transition. So can you talk about just how we should think about the key drivers of the Technology Solutions business and whether it can be sort of greener and more energy transition versus the traditional energy view of KBR historically? Thanks, and I'll get back in queue.

Jamie, that's a terrific question and it gives me a great opportunity to say that's exactly how you should be thinking about KBR in this context. The tech business itself, as I've laid out in the slides, is driven by three major elements: one is food production around ammonia, which is all about a sustainable future for the planet and is driven by people moving into the middle class and GDP growth around food production. That business has been terrific over many years, and we're arguably the world leader in that space. Secondly, olefins, which is really about non-single-use plastics, again driven by people moving into the middle class and GDP growth. So again, the dynamics are not really driven at all by traditional oil and gas. The third element is sustainable technology around refining, and I've talked many times about our developed technologies in that area, where we are market leaders. We continue to see very strong demand. At the same time, we've put a lot of effort into positioning our advisory business. That’s all about advising governments and companies about energy efficiency, reduction in carbon, and energy transition—hydrogen being a key component where we think the transportation medium for hydrogen going forward is likely to be ammonia. We've discussed our position there from a technology perspective. Once you store hydrogen, the world leaders in hydrogen storage are NASA, because of how they fuel their rockets, and we're heavily engaged in that side as well. So we've got a lot of critical components we can offer as the world evolves in energy transition, which is gaining momentum today. We've highlighted our IP-led, technology-led industrial maintenance business. We have proven digital solutions that allow us to monitor facilities remotely from a central hub, advising customers on how to enhance production and reduce energy usage. Everything happening in new TS connects to technology and future-facing aspects of energy transition and climate change. So it has moved away from the traditional energy focus, and that’s a key part of the message here.

We will now take our next question from Tobey Sommer from Truist. Please go ahead.

Thank you. If we get a federal spending decline following all the stimulus debt accumulation, which aspects of your Government business do you feel has the best prospects for continued growth? And which ones are you less confident about?

Tobey, there are a lot of points to consider. From an overall business perspective, you have to remember we're differentiated with our international government profile, which is not impacted by what's happening in the U.S. today, nor is our tech business. We're very much aligned with national security priorities. Our people do things that matter, and we're proud of this fact. We're operationally engaged in a lot of what we do, and those assets supporting the International Space Station are not going away. I think the area that may change depending on a reduction in government spending is what happens in the Middle East and Afghanistan. Our long-term strategy of reducing exposure to OCO funding is paying off because we have a far more predictable outlook than we had. We'll get into Q4 and look at our guidance for next year and provide color on the quantums involved, but it won't be material going forward. So that would be the area, but I think we've mitigated that risk significantly.

Just a question about the medium-term growth algorithm for the company. Could you comment on that over the next two or three years? Do you plan to update this kind of in a more formal setting in an Investor Day at some point in 2021?

I think we have to, Tobey. The business has changed. With the introduction of Centauri, we'll see what happens next week. Of course, we'll take that into consideration. We have also changed our focus around the technology portfolio. We do need to come back and talk more broadly about our growth targets over the longer term at an Investor Day, and we'll do that in 2021 for sure.

We will now take our next question from Steven Fisher from UBS. Please go ahead.

Thanks. Good morning and a nice quarter. The cash flow was stronger than expected. You raised your cash flow guidance. It sounds like for Centauri; I know Mark, you reiterated your capital deployment priorities. But can you give a little more color there? To what extent are there acquisition opportunities that are swirling around that you're considering? And since you are at the lower end of your leverage range, how attractive is the buyback option at this point? Why not step up and do some more of that now with Centauri behind you?

Well, Steve, thanks for the comments on the quarter; we appreciate that. First, I'd say that the cash flow performance or overperformance is really attributable to KBR before Centauri. We're well ahead of last year already through Q3, and it is a testament to the team and the process improvements we've made. Cash is a team sport, and we're pleased to see that. Centauri will add cash flows going forward, but we were pretty cautious in our Q4 outlook on the guidance, because you never know what's going to happen on the last day of the year, number one. We also have deal costs coming through in the fourth quarter that will hit cash flow. That's why we're cautious just for the fourth quarter. But the overall cash flow production of the business, both before and after Centauri, is attractive. As we've consistently done, M&A has been an instrumental part of our transformation and the resiliency you now see in the performance. We will continue to evaluate what's on the market and be agile relative to that, but we have very strict criteria. If nothing meets that criteria, we've been clear that buybacks are an attractive option when we are enabled or allowed to do so, which has been a restriction in the past. Some of that's lifted, so we have great opportunities to do both going forward, and we like the idea of a balanced approach over the long term.

Okay. That's helpful. As a follow-up, it was also helpful to see the separate slides for your Government Solutions segment. Each of these segments is growing at double digits, with a strong book-to-bill with the exception of the LOGCAP work. Should we assume that this business is overall growing at a double-digit rate ex-LOGCAP? I'm wondering how much of a drag that LOGCAP business is and when you think that could neutralize?

We're really pleased with the growth we're seeing in the higher-end areas of our portfolio that Stuart and I mentioned. We've pointed out that there are two main parts of logistics. There's the scientific part that plays in the O&M space and there's a contingency part, which is more volatile. We've pivoted a big chunk of the business away from that, so we've to be honest; the contingency part will ebb and flow with geopolitical issues. We'll be there to serve when needed, and this will go up and down as it has in the past, affecting the top line. We’re focused on everything else we do control and having an attractive pipeline to win and execute that business very well; I think we've proven that. We'll provide quantum on that for 2021 at the right time, but the past few quarters show that double digits are possible in these areas. The synergies from Centauri will only provide a further catalyst for strong growth there. We have to wait and see how the logistics piece and what the government wants to do will impact that, but we're confident there'll be attractive profitability and cash flow, and we'll deploy it smartly.

To be honest, Steve, I'm feeling pretty good about the logistics business, albeit with cautious words about the Middle East. It's a fantastically good business. We're as good as anyone at doing complex logistics work, and the majority of it has transitioned into the O&M budget cycle. The book-to-bill in the quarter was 1.4 for that business, and none of that really is in the OCO exposure area. We haven't included what we've won with the UAE BOSS contract, which is a long-term O&M funded contract. Once that comes through the protests, which should happen in Q4, I think we can have a good line of sight for growth in the logistics arena. So I'm feeling quite good about that. Mark is right – there may be downward pressure in the OCO piece, but you'll see in Q4 that from a material perspective, that has changed significantly. The work we've won recently should underpin continued growth in that segment.

We will now take our next question from Sean Eastman from KeyBanc Capital. Please go ahead.

Hi, thanks for taking my question. First one from me is, are you standing by the broad framework for 2021 combined with Centauri? Does the 90% to 110% conversion of income to free cash flow around that framework hold, or is there anything else we need to consider into next year that may change that algorithm?

No, our focus on cash and the resulting output in the way we've performed this year is clear, Sean. Certainly, I know Mark and the team—they're doing an exceptional job. I don't see that changing going forward. We've performed remarkably well and maintaining those numbers is difficult. But coming into the above one range is where we're driving the business. I think we’re demonstrating that successfully. If that's how you model cash, I think you're on the right track.

Correct. I'll affirm that. Nothing special that would change our view relative to the 90% to 110% for 2021 as we see it today. All should be normal. It'll probably be above that range this year, but we're confident the predictability will be there, and our cash flow will remain attractive.

That's terrific. And going back to the new technology segment, last quarter, you outlined a straight-line trajectory from mid-teens margins in 2021 to high-teens in the coming years. You touched on the revenue driver angle, but I wanted more color on that bridge from mid to high teens. Just what's driving that? What key metrics should we track to assess progress?

Mark gave a good explanation on this. It’s not insurmountable and it's credible to look at the returns. From moving next year's mid-teens to high teens, I think you’ll see growth in the base technology business which has a very high margin-driven business. You'll also see growth in our advisory business and in the IP maintenance business, which all come with strong margins. As those grow relative to the business, you'll see upward pressure on margins. The second piece is that KBR is a 100-year company, which we're proud of; however, with that comes complexity, and we're taking that complexity out over time. We've good line of sight to entity reduction and reductions in costs, but it takes time. That's why we’re saying 1% to 2% increase per year until we get to the high teens/low-20s margin range. There are two levers to pull here, and both are extremely credible.

We will now take our next question from Gautam Khanna from Cowen. Please go ahead.

Hi. This is Scott on for Gautam. Just two questions; first one in Centauri, how much of the growth in 2021 is predicated on the direct energy solution? Do you have any orders for that solution already?

Good question, and I'll reiterate what we said during the Centauri acquisition launch. The directed energy piece—lasers, in layman's terms—is exciting because it has the opportunity to progress into a program of record. However, because programs like that take time to come to fruition, our growth forecast excludes that, so it's all upside. The base Centauri business we presented is the core of what they do. We're excited about their opportunities in directed energy—they've recently won more work in that area, highlighting their key skills and unique capabilities. We see that as an amazing upside opportunity not reflected in our growth numbers.

Okay. That is clear, thank you. Just a second question for me; some people have talked about it, but Government Solutions is expected to see double-digit growth in 2021. Do any of the recent win protests concern you about reaching that number?

No, I think people are aware of the MOSSI situation. We did everything right; the protest was upheld but had nothing to do with us. It is frustrating because when you do nothing wrong and it goes to a rebid, that's frustrating. However, I’m not worried about the mainstay of the business; we have long-term contracts underpinning that performance. I believe that defense modernization, space superiority, and growth in the intelligence community will continue. Those near-peer threats remain. The area that might change depending on federal spending reduction will be what happens in the Middle East and Afghanistan. Our long-term strategy of reducing exposure to OCO funding is paying off, providing a much more predictable outlook going forward.

Just one question—can you provide an update on Ichthys? Refresh us on timing and your overall expectations going into 2021 and 2022 about negotiations?

Ichthys remains in the legal process, as it's been for some time. COVID will delay that legal process in some cases more than others. The more technical cases are less impacted, while those requiring face-to-face testimonies and hearings are delayed. We think that the CCPP, which is the power station piece that we're disputing, has been delayed by six months. We previously expected that case to wrap in February, but it's now likely to extend to the August-September-October timeframe due to COVID. Any recoveries of money there are likely going to flow into 2022. Negotiations are a possibility to resolve this amicably, but it's tough to give detail on timing.

Stuart, question on the Government business. Are you seeing delays in government contracting bid packages advancing because of COVID? Any unusual push in opportunities that might transpire this quarter?

Not really, Brent. We had a strong book-to-bill in GS of 1.3, testament to the DoD's operational efficiency even during COVID. In particular, Australia seems to be moving quickly to get people on contract; they’re paying us ahead of time, which is great. Overall, I'm not seeing too much slowdown. A strong book-to-bill ratio is evidence of that; it has been a terrific run.

We will now take our next question from Andrew Lee from Citi. Please go ahead.

Hey, thanks. Just with the Centauri acquisition completed on October 1, could you give us some initial thoughts on what you're seeing with the business? Anything to highlight other than what was discussed on the August call?

It's still new. I visited their offices in Chantilly, Huntsville, and Dayton. I was thrilled by the people and their technical quality. They have world leaders in what they do, and I see fantastic opportunity within that. I'm more excited after my visits and discussions face-to-face. We feel good about what we've put into our numbers for next year, underpinned by our high level of work in hand. They won more recent work in the laser-directed energy realm, so I think we'll have more color on this as we get into it, but very upbeat overall.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.