Centauri, LLC (KBR) Earnings Call Transcript & Summary

Good day, and welcome to the KBR Conference Call. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Alison Vasquez. Please go ahead.

Thank you, Serge. Good morning, and thank you for joining us. Today, we announced that KBR has agreed to acquire Centauri in an all-cash transaction. The press release and presentation are published on the Investors section of our website at kbr.com. On the call today are Stuart Bradie, President and Chief Executive Officer; Byron Bright, President of Government Solutions; and Mark Sopp, Executive Vice President and Chief Financial Officer. Today's discussion contains 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 actual results to differ significantly as discussed in the company's most recent Form 10-K available on our website. I will now turn the call over to Stuart.

Thank you, Alison, and thank you all for joining us on such short notice. Today is a very exciting day for KBR. As you probably gathered, we've announced the transformational acquisition of Centauri. It's a highly strategic, very complementary and accretive transaction that creates significant revenue synergies and long-term growth opportunities, and we expect to close the deal in early Q4. Over the next 30 minutes or so, I'll take you through the why and why now? And then as you've heard, we'll be joined by Byron, who leads our government business globally. He'll talk a bit more detail about what's Centauri and the amazing capabilities and IP that the great people bring. And then Mark will lay out the financial rationale, the key metrics. And I'll close with a focus on whole KBR with Centauri as part of the KBR family. So let's begin on Slide 3 with a few takeaways. I want to start by touching briefly on our M&A philosophy, which you've heard me talk about before. I mean acquisitions have been important to the transformation of KBR, as you're well aware. As our largest to date Centauri is arguably the most transformational. But I wish to be clear that we remain true to what we believe makes M&A successful in a people business, which this is. Firstly, and a fundamental is that 1 plus 1 must be greater than 2, meaning minimum overlap and a true focus on revenue synergy and that's giving people more and getting them excited about the combination and its potential rather than worrying if they'll have a job tomorrow. So this is all about future facing, get people excited about the future and its potential. There has to be strong cultural and values alignment, and that's absolutely clear here, as is a firm strategic fit, and we'll show you in a moment that Centauri is buying on strategy. Centauri accelerates KBR further up the space leadership ladder, effectively adding the third leg of military intelligence to a scientific civil and commercial space franchises. We achieve immediate scale in markets absolutely critical to national security at a time when this is front of mind, and as you would expect, in areas with strong bipartisan support. As Byron explains the business and the critical activities, you will quickly appreciate the relationship stickiness, understand why the win rate is so high and really get why the barriers to entry are also so high. The 1,750 strong personnel are highly qualified and absolute leaders in their fields. Over 75% hold clearances at the highest level. And for those familiar with the intel and classified world, you will appreciate this is a big deal. The interplay potential across the space activities delivers obvious exciting synergy opportunities. But as you will see later, there are multiple exciting growth opportunities that align with DoD and space force published priorities. This has been and will continue to be a high-growth business with attractive margins and earnings that benefit from a high-cash efficiency operating model that Mark will walk you through later. So on to Slide 4. In our Investor Day in May 2019, and again, at our recent Government Solutions and Focus Day, we presented our strategic growth vectors, which are shown here. Centauri accelerates our growth in both defense modernization and space exploitation. Byron will expand on this later, but I wanted to ensure that the strategic fit at the highest level was clearly explained and that it tied clearly to our previously published growth vectors. So on to Slide 5. Clearly, we believe Centauri is a highly strategic and complementary acquisition and one that accelerates KBR's vision. But let's spend a moment on why Centauri and why now? So let's start on the left box, why Centauri? As I said previously, this is bang-on our strategy. It accelerates our leadership position in space superiority, including space domain awareness, again, a big deal. And it's purely additive and complementary to our existing and sizable space franchise. It takes KBR further upmarket and into the intel market, broadening and deepening our customer relationships, very important, but it does so at scale and with attractive growth fundamentals. Byron will also expand on the work Centauri does on space systems, microelectronics, sensors and other specialized areas. These are all future-focused, highly differentiated and exciting in their own right. Generally speaking, it is a challenge to break into the intel community who are specialized personnel and the required clearances and facilities and IP are required. So Centauri brings a deep bench of these specialized personnel and facilities and IP, making it both a strategy accelerant and a great fit with KBR with little to no overlap. Complementary growth opportunities are exciting and importantly are firmly aligned with DoD and U.S. Space Force published strategy. As to the why now, please turn your attention to the box on the right. At a time when there is significant political uncertainty, Centauri brings added stability and resilience. The critical work they do is focused on national security and DoD priorities and comes, as you would expect, with strong bipartisan support. On a go-forward basis, our government services portfolio will be further diversified and balanced across defense, space, intelligence and international markets, really spreading concentration, as illustrated in the pie chart on the bottom of the slide. In addition, the valuation multiples of government services peers have traded down a couple of tons in recent times, which I think is reflected in the purchase price, so a good time. Centauri is by no means cheap, but it is certainly well below the multiples we saw in 2019 and in early 2020 for similar high end assets. This has all coincided, of course, with attractive debt markets, KBR's strong balance sheet and our continued proven cash generation, which you've seen in the past few quarters, which combined, enable us to be opportunistic and strategic in our approach and timing to this immediately accretive transaction. So that is why Centauri makes sense for KBR. And now I'll hand over to Byron to tell you a bit more about them. Byron?

Thank you, Stuart. I'm really excited about joining forces with the 1,750 professionals at Centauri. Like KBR, Centauri is focused on high-impact mission-critical solutions. They are a perfect fit to our strategy of continuing to move upmarket. Now turning to Slide 6. Let's take a deeper look at their portfolio. Centauri has achieved strong double-digit growth over the last 2 years and is forecasting approximately $700 million in 2021 revenue at 10% EBITDA margins. This represents solid growth with already 80% of 2021 revenue under contract. You can see that they have maintained very high win rates of approximately 80%, which is indicative of the strong technical content and close customer intimacy, including a significant amount of Sole Source awards. The type of work they bid is differentiated, often classified and always technically challenging, creating really high barriers of entry for their competitors. Now Centauri goes to market along 3 business lines, as shown in the lower left pie chart, a significant amount of their portfolio is related to developing solutions around space domain awareness. These include expertise in electro optical infrared systems, complex physics-based tracking algorithms, ISR sensor development and advanced materials research. The first business area, space superiority and missile defense uses this expertise in the research, development and rapid prototyping phase of system design. They are experts in integrating these complex systems such as optics, radars and electronic warfare with emerging technologies and helping the customers take them from prototypes to production. Now in addition to this domain expertise, they also operate research laboratories, significant classified facilities and networks, and they own a suite of proprietary IP-protected tools and algorithms. The second business area called Space & ISR engineering is primarily focused on supporting the operations of the National Reconnaissance Office, the NRO. The NRO is the primary agency that develops, builds, launches and operate space reconnaissance assets. Centauri has over 400 people embedded in nearly every tower of the NRO, providing systems engineering, program management, data analytics and technical advisory services related to space-based capabilities. The majority of this work is highly classified. Centauri's third business area, intel, electronic warfare and cyber supports multiple other intelligence agencies. Again, the majority of this work is classified, but they have deep domain expertise in various radar, electronic warfare and RF systems. When we talk about cyber, their expertise is both offensive and defensive capabilities. They are focused on several critical growth areas such as trusted microelectronics and the protection of satellite and data such as our nation's GPS systems. The milli graph on the bottom shows a balanced 50-50 split between the Department of Defense and the intelligence customers. Now for KBR, this creates significant growth opportunity as today, we have limited access to the intel community. On the next several slides, I'll talk about Centauri's unique capabilities and why we see this as a growing market with continued bipartisan support and strong funding priorities. Turning to Slide 7. This shows a graphical representation of the complex environment of what we call space domain awareness. Centauri has expertise across all of these systems and domains. Their people are highly skilled with deep domain knowledge and truly a national asset. It requires years of classified experience to work on these systems and is not something other companies can replicate quickly. Now starting in the center of this graph, the basic phases of the space domain awareness mission include identifying, monitoring, characterizing, accessing and exploiting the space-based information. To support this mission, you must have expertise in ground-based sensors represented on the left, understanding what foreign optics are in the sky. You have to understand the communication and data links represented in the middle. And then to the far right, you have to have a knowledge of missile defense and the electronic warfare response infrastructure. As you can see, what makes this mission-critical and why we believe it has both priority funding and bipartisan support is the threat. Our adversaries are constantly challenging the U.S. and allies in space. For the U.S. to maintain military superiority, we must first secure the high ground and maintain space and information superiority or as the new U.S. Space Force motto says, Semper Supra, Always Above. There's no higher priority in our national defense strategy. The space-based capabilities promote both strategic and tactical superiority from nuclear deterrents and early warning to tactical communications and intelligence-based decision-making for our war fighters. So while this visual provides an overview of the complex space domain mission, Slide 8, to turn there, illustrates how integral Centauri is throughout these different missions. They bring KBR an immediate franchise position in the center of this market, supporting multiple customers with signal intelligence, geo intelligence, radar signatures and the ability to fuse all of these systems together to generate actionable data products for both the DoD and intel customers. Moving to Slide 9. As Stuart mentioned with our strategic thrust, you can see here the top 9 defense department priorities for modernization. Centauri has active and meaningful work across all of these critical areas. We've talked in-depth about the first 3 in our core position in the NRO, but I want to point out a couple of others. In the area of missile defense, Centauri has a long relationship with a national air and space intelligence center in Wright-Patterson, Ohio. Here, they deliver unique expertise in evaluating foreign space and weapon technologies. And probably one of the most exciting parts of their portfolio is their work in directed energy. In layman's terms, lasers. They are the lead system integrator for a high-priority program, where the primary threat is to counter small UAVs and rockets. Centauri oversees several OEMs and is integrating Centauri software into full-scale prototypes. This is one of several programs that could lead to significant upside. On the right-hand side of the chart, you can also see other examples of areas such as hypersonics and microelectronics that are equally exciting. In addition to the physical labs, I mentioned earlier, Centauri owns several IP-protected tools and algorithms that support emerging areas in cyber, assured microelectronics and quantum computing data analytics. All of these areas are high-growth, high-margin and high barriers to entry. Now turning to Slide 10. As Stuart mentioned, KBR's success in past acquisitions is due in part to our focus on driving growth and delivering revenue synergies. We look for well-run companies with very little overlap, a people focused and mission-focused culture and high-end technical content. Centauri meets or exceeds all our criteria. But what really excites me is their people. Throughout this process of due diligence, I've gotten to know Centauri's core leadership team, and I've met many of their software engineers and analysts. They are passionate about solving some of the nation's most complex challenges and recognize the importance of their work on our national security. The Centauri culture is a perfect fit to KBR's, we deliver ethos. But in addition to culture, we've also identified several specific areas where we see near-term synergy opportunities listed on this slide. They strengthen our space franchise, giving us exposure to military space markets, including the new U.S. Space Force. And similarly, we can leverage our significant NASA capabilities and franchise with these new customers. There are synergies with our existing cyber portfolio and Centauri's expertise in trusted microelectronics and electronic warfare, giving us more scale in this arena. Now for Centauri, KBR opens up access to a large suite of IDIQ contracts that they don't currently have. And Centauri can leverage those contracts immediately for additional growth with its -- with existing customers. Centauri provides us immediate capabilities in the intelligence community, and we enhance each other's win rates. And finally, we're going to come out of this to be a larger and more specialized organization with exciting opportunities for both new and existing employees. And as Stuart said, it's really all about the people. In summary, I'll say it again. We are excited about joining forces with the Centauri's team. Together, we will do great things, make our country safer and deliver long-term value to our shareholders. Now I'll hand it over to Mark to discuss the transaction details and financial outlook.

Great. Thank you, Byron. Well done. I'll pick up on Slide 11 with a quick recap of the financials on the transaction. As you'll see, in addition to being the strong strategic fit that it is, the deal pencils out very attractively on the financial front. The purchase price of about $800 million reflects a multiple of 11x expected 2021 EBITDA. It's important to again note, as Byron said earlier, 80% of the '21 forecast is already secured in backlog today. This underscores Centauri's strong track record of growth and its new business win rate. This is a business that has strong visibility as is the case for the rest of our government business. In terms of funding the transaction, and as we recently have discussed our deliberate transformation and consistently strong performance, has produced an improved balance sheet and credit profile, and this enhances the value Centauri can bring to KBR. We expect to fund the transaction with about $300 million of cash on hand, with the remainder financed from a combination of tapping our revolving credit facility and issuing notes. The combined financing will balance our desire to preserve liquidity, spread maturities, maximize future financing options and lower our overall cost of capital. Upon closing of the transaction, which is targeted in Q4, we expect our net leverage ratio to be about 2.5x. This aligns well with our government solutions peers, perhaps even on the low side. Our liquidity, including cash and access to committed secured debt capacity will remain very strong after the acquisition at well over $0.5 billion. This is largely achieved by our greater profit scale and the $500 million conversion of letter of credit capacity to revolving line of credit capacity that we did back in June. Now over to Slide 12. As you've heard, Centauri's revenue growth, profit margins and cash flow conversion are all attractive and complementary additions to the KBR financial profile. As Stuart mentioned earlier, this adds a fast-growing upmarket leader, which by itself, brings considerable added scale to our existing leadership presence in space and defense modernization areas. Centauri has produced 20% plus organic growth over the past couple of years, and we see continued double-digit growth in the next few years ahead, with specialized capability sets cutting directly across our nation's highest national security priorities. In addition, Centauri has a low recompete risk profile in '21 and '22, which enables near-term focus on winning new business and also integrating with KBR. Skill sets, qualifications, such as special clearances and contract vehicles in these high-priority areas -- sorry, high-priority areas are indeed very scarce and assets come with attractive profit margins. The addition of Centauri brings attractive margins at scale and enables us to bump up our long-term targeted EBITDA margins for our Government Solutions segment overall to 10% plus. We expect the scale, margins and attractive financing terms to produce an attractive accretion in 2021, adjusted EPS of $0.25 to $0.30. And as consistent with the rest of KBR, Centauri's capital intensity is quite low, with CapEx well less than 1% of revenue. We expect net income to convert 1:1 to operating cash flow, adding to capital deployment firepower right out of the gate. Together, the deal produces an expected internal rate of return of 15% plus, making this a very attractive deployment of capital with the benefits of increased scale, highly specialized skill sets, direct involvement in some of our nation's highest priority security programs, and as Stuart discussed earlier, overall resiliency. That finishes up my remarks. I'll turn it back to Stuart.

Thanks, Mark. Terrific. So a couple of slides to close. Firstly, some high-level conclusions on Slide 13. I mean, obviously, we're very, very excited about this acquisition and of course, the transformational impact it will have on KBR over the long term. Centauri takes KBR into very attractive strategic areas firmly aligned with our vision and importantly, aligned with national security and DoD priorities, as we talked about earlier. And as you would expect, these come with strong bipartisan support. Centauri expands KBR's high-end capabilities, broadens our customer relationships, that stickiness is just can't be undervalued. With little overlap, clear revenue synergies and growth opportunities, quite simply, it's a great fit. Centauri's 750 highly skilled people aligned with KBR's strong value-based culture and mission focus. And Centauri enhances KBR's financial outlook with attractive accretion, CAGR, margin expansion and cash generation, thus creating shareholder value by accelerating growth and delivering long-term value. So on to our final slide. And here, this will give you a holistic KBR view with Centauri and recently announced portfolio changes. I'm not going to read all the words, but I'll pick out some of the highlights. Our business description has been updated to reflect who KBR is today. And the attended core capabilities below. I'm not going to read them. I'll let you read them at your leisure. What's important is that value is delivered by 30,000 highly skilled and committed people, which is circa $200,000 of annual revenue per person, reflecting the continued move upmarket of KBR. Similarly, again, reflecting the higher end services we provide, margin at the group level will increase to around 9%. In 2021, KBR will expect to have revenues close to circa $6 billion and a backlog of $16 billion to $16.5 billion. We'll provide formal guidance in connection with our fourth quarter earnings. But I can tell you, as you've heard previously that much of the work to deliver 2021 is already secured, and we have a really, really strong line of sight to strong growth in '21, both organically and accretively with Centauri. As we move further upmarket, our differentiation also becomes stronger, helping retain contracts, improve win rates and maintain and improve margins. We have an existing strong contract base with attractive tenures, as you're well aware, deep domain expertise, know-how and true IP, with value being delivered by highly skilled and culturally aligned teams. Barriers to entry are high, and this helps drive top-tier growth and importantly, cash generation. In these circles chart, you can see the relative sizes of our business lines, the customer set they serve and the contract type. The takeaway here is really balance and scale and thus limited concentration risk. Centauri is an absolute terrific addition to KBR. Hopefully, we've explained the why in presenting what they do, how they fit and what KBR will look like with Centauri as we move into 2021. I will now open the call for questions.

[Operator Instructions] Andy Kaplowitz, Citigroup.

Congrats on the deal. Stuart, can you give us some more color into what Centauri has been growing at over the last couple of years? We know that the company has done a couple of acquisitions pretty recently, but you put out that 15% CAGR to 2024. So I was just curious into the conviction in that. Are there any new contracts that you're counting on winning? Or anything else that you'd sort of point out? I know you mentioned the low rebids that you have, which is good to see.

No. I mean, that key point in the rebids is up, I'm glad you reminded everyone of that. Andy, they -- I mean they've been growing at quite high-growth levels, well over double-digit over the last couple of years. I think the important takeaway in terms of the growth into next year, is the work in hand and the line of sight we have to delivering on that. And the fact that we think there's very strong synergies, but we've been quite conservative in that outlook, particularly in '21, just because the pipeline, as you know, it's quite mature in government. So are there any key wins that we were sort of hanging on to looking forward? I think the answer to that over the '21 cycle is, no. I think there's significant upside potential from what we're modeling. But as you know, it's all about timing and all about securing those wins. So that's why we're feeling pretty strong about this asset in general, the level of secured work, the stickiness of the contracts, their low recompete win rates and the upside potential that Byron expanded on in things like directed energy, et cetera.

That's great, Stuart. And then you mentioned pro forma KBR, 9% adjusted EBITDA margins. I guess it just seems a bit conservative given Centauri's double-digit margin. I know you're rounding, but I guess, what's the potential to do better than that over time? I think you mentioned that 10% plus. But even in '21, if your technology business is in recovery and you don't have significant COVID-related disruption?

I mean, you've got to remember that when we're giving the EBITDA numbers of our government segment now moving into the double-digit category going forward on the long term, which I think is a real positive coming out of this transaction. We're on the cusp of that, as you're aware, and this really takes us firmly into that territory. Combined, as you said, with tech in the mid-teens. And then we've got our SG&A coming out the bottom of that. So I mean, I think we're moving up, and it's all -- as we always try to do, we try to give reasonable targets that are -- we like to do better than the targets we put out. I mean I would say this is -- if you do the math on this, the potential of KBR in term EPS growth into next year is significant even with these margins, Andy. So if this -- if we do better than that, we'll do even better than what's on the sheet, obviously.

Very helpful. And then, Mark, just real quickly on the tax benefit. I didn't catch how big that tax benefit is as a percentage of the deal itself.

It's a little bit less than 5% of the value of the deal, and it pertains to deductible goodwill of previous acquisitions that Centauri had made to build the portfolio that we have today.

Jerry Revich, Goldman Sachs.

I'm wondering if we could just maybe put some numbers around the opportunities you folks laid out on Slide 10 of the presentation in terms of [Audio Gap] talk about how do you feel about the platform opportunities here within the context of the prior deals that you folks have completed?

Yes. I mean, Jerry, you're quite hard to hear there, you're breaking up a bit, but I had Slide 10, so assuming you're talking about the synergy opportunities and the relative scale there. I think the best way to frame that is that, as I said earlier, the pipeline and the maturity of how that moves through the procurement cycle, although we -- you can accelerate that somewhat with our IDIQ contract vehicles, we've taken a very conservative view in '21. We do think progressively through to '24, that there's the opportunity to do from a revenue perspective, somewhere circa $600 million of synergy across this portfolio and other areas that Byron touched earlier, just -- and that would be increasing through the term. And we'll give a bit more color to that as we get into Q4 earnings, but that's the sort of quantums that we're looking at. So quite attractive, very exciting across multiple areas, and we really think this is terrific.

That's a sizable number. And then nice to see the EBITDA margin targets increase for the segment as a whole, which certainly points to higher confidence that you folks have on the sustainability of margins that you've been delivering for the base platform. Can you spend a minute about that? Because I know you were setting a more conservative tone at the Analyst Day. So maybe touch on what gives you the higher confidence in raising the margin outlook for the base GS platform?

Yes. I mean, I think you've got to remember when we did the GS and Focus Day was really around the -- we kind of lend forward into an Analyst Day just after COVID and lockdown, and I think there was still some views there in terms of better to be somewhat the uncertainty and just how things are going to play out. But I think we've really seen our government customers lean forward. Our business continues to deliver at sort of higher level margins. Centauri is really additive to that. And so it gives us both our recent performance and the addition of Centauri really gives us confidence to forecast those margins and be confident that there'll be double-digit plus going forward.

Okay. And lastly, can you just touch on the M&A pipeline from here? Are you folks still actively looking? Or should we think of a pause in the M&A time allocation for the management team here as we digest this acquisition?

Jerry, only you would ask that question before we've even closed the deal. But I mean, I think we have to close this and take stock. But what I would say is that our net leverage level, as Mark said, at 2.5x is still very much in the -- it's actually lower than our peer group and the government segment and reflecting the risk profile across that segment. So we feel pretty good about where we sit. And so I do think there's capital deployment opportunities, whether that be in M&A or buybacks as we move into next year. And -- but we've got to let the dust settle on this. We've got to focus on the value creation that this brings. And I mean, again, from the last slide that I presented, you can really see the shape of what new KBR is in this transformed area. And it really sort of demonstrates that if we get this right, the levels of growth are significant and very, very attractive, both organically and accretively. So I think that's going to be our focus. As I said, we will have capital deployment opportunities into '21, given our current leverage ratio. So I think it all sets up nicely. But it's difficult to find assets that fit as well as Centauri. I mean this is a rare, rare opportunity to buy something in the intelligence and classified and arena that has very little overlap if really no overlap with KBR and with the right culture and values. And the level of clearances and classified personnel, the highly skilled nature of the workforce. And we're really thrilled with those 750 people that are coming on board. And so we'll continue to kiss a lot of frogs. But you've got to kiss a lot of frogs to find your prince and I think Centauri has proven that out. And -- but I think the immediate focus is on integrating this properly and realizing the value as we've laid out.

Steve Fisher, UBS.

Congratulations on the deal. Just wondering how we should think about that accretion beyond 2021? And I'm not sure if you're able to kind of put any numbers around it, but relative to the $0.25 to $0.30 in 2021, as we think about, say, 2022, should that accretion be growing with kind of a consistent rate with the 15% to 20% top line CAGR? Are there other synergies or savings or debt reduction benefits that may take that number materially higher as we think about kind of framing 2022?

I mean I think, Steve, that's -- we're not giving official guidance here. I think you've got to wait until Q4 for that. We'll try to lay out what it means in '21. And we've also given you the CAGR that goes along with it. And I think that's a good starting point. And I mean, this is a business that has been growing well above double-digit and in the last few years and continues to do so as we move into next year, and we expect that growth cadence to continue. So again, with synergies, it's going to be highly attractive. But it's -- we're not today giving numbers around what we're going to do in '22, and we need to think through the longer-term targets and just how that all fits together. But I do think that ultimately, you -- I mean, I saw you a little note this morning. And it's interesting what you think we'll get in 2022. I think we can -- we'll be aiming to do a bit better than that.

That's helpful. And then obviously, in a few weeks ago, you made some moves to affect the technology business. I'm curious how does this acquisition affect your thinking about the technology business and the portfolio overall. I think you made a passing comment more on today's call, the relevance there, but does this make you kind of more focused on making sure you're extracting the multiple from the market on the government business, given that you're going more high-end here. And if you don't get that, does then that make you think about perhaps some strategic alternatives for the technology business?

Yes. I mean, I don't really talk too much about technology today, per se. We've tried to lay it out on the last slide, just where it fits from a scale perspective and how it sits within the portfolio. Again, the core capabilities sit very nicely across the businesses. The whole drive here is shareholder value. We're not emotional about that. We've got to be thinking about that as we go forward, and I've said that many times. And we've taken the opportunity because of the strategic nature of Centauri to move upmarket and into intel and classified arenas and particularly rounding out our space franchise, and we're very, very excited about that. And if we don't realize the value, then obviously, we have to pull a lot of levers, Steve. And again, I've been very clear about that. And from an unemotional shareholder value perspective, we've got -- that's our job.

Sean Eastman, KeyBanc Capital Markets.

Congrats on the deal. I just wanted to start on the revenue synergy potential. Stuart, I think you said $600 million in potential revenue synergy opportunities through 2024. I'm just curious whether there's somewhere in particular, if we look at Slide 9, just across the inventory capability set, if there's 1 or 2 elements there where that synergy potential is concentrated or whether it's just across the whole portfolio? And then maybe if you could just touch on just backward-looking on SGT, HTS, Wiley, what you guys have been able to achieve there from a revenue synergy perspective, maybe relative to your initial expectations, that would be a good discussion.

Okay. So I'm going to answer the second question, which -- and I'm going to do that first to give Byron a chance to answer the first question, so you can think about that answer. So from an SGT, Honeywell and Wiley perspective, I mean, we have realized synergies there well beyond expectation. And we've talked a few -- I think the beauty of bringing core skill sets together and looking at this sort of relevant past experience that you can bring to bear when you bring these companies together and the capability sets together, you can go after things that you couldn't do alone. And that's absolutely been the case. We've certainly increased our Pwin ratios. We're winning sort of things like the Mossy contract recently in Huntsville, we could never have done that as a stand-alone KBR entity. And when I look at things like POTFF, which is Preservation of the Force and Family, leveraging our NASA capability supporting the astronauts and bringing that to bear with a special forces where we had other types of relationships historically and putting those together to take that deal away from Booz. I mean so there's been a number of those across our portfolio that we would never have realized without the synergy opportunity and this broadened experience and capability set. So I think we've demonstrated leading organic growth in the Government Services segment without exception over the past few years. And that has been driven by these synergy wins and the opportunity set that we would never have been to get access to in the past. So I think we've proven that our acquisition thesis excites people and gets them focused on into new areas by giving them more, it's a winning formula. I keep saying, it's all about the people. It's all about getting people excited about new areas and doing great things. And if you can sort of have the capability set, you can combine and excite people into these new areas, it's really terrific. And I think Centauri brings that in space. So then I'll let Byron answer the next -- the first part of your question, Sean.

Thanks, Stuart. And great question. I mean I think in general, there are many areas of synergies that excite us. But I think right out of the gate, Centauri because the nature of the classified work they do, a lot of their work has been sole-sourced or they use OTAs, to grow their business. And KBR has a really strong business development program and team. And we talked a lot about that in the GS IR event. Centauri doesn't have contracts like OASIS and IAC MAC and RS3 and all of these IDIQs, so kind of across the board with existing customers of Centauri, they're going to have the immediate ability to offer their customers various contracts to get task order work on. So that's probably the first synergy that I think we can get some real quicker lens on. From a technical standpoint, I think the thing that excites me is the combination of the capabilities we have in NASA. And we've got significant satellite network ground station support work. And that fits very nicely with Centauri's push into the U.S. Space Force and space and missile center down out of LA. We also have complementary skill sets at the Air Force Research Lab. So again, those are areas, I think we both have customer knowledge, but we operate in different areas. When I think of Centauri, I think a lot about the really high-end model-based systems engineering, algorithm development, the electronic things. And when I think of KBR in our engineering business, I think platforms, the F18, the big Patriot missile systems. So where they're more in the electronics and the algorithms and the physics-based modeling and the satellites, KBR has got more of the traditional kind of aircraft and platform and UAVs. And so together, this whole area of C4ISR integration in this nexus between the artificial intelligence and software is where I think we'll find some really strong synergies.

Excellent. Really helpful. And then the other one, Andy alluded to this. But just in light of how Centauri was conceived, including multiple fairly recent acquisitions from them. Just curious if you could sort of comment on the integration heavy lifting in front of you guys here? And are there -- there's any integration risk associated with that $0.25 to $0.30 accretion forecast for next year?

Yes. I mean, again, very good question. I think we've got quite a -- what I believe is our approach to, as Byron alluded to in his remarks, is that we try to look for very well-run businesses that are clearly absolutely at the top of their game. And we -- as a consequence of that, when we go into an integration process, we do not have the arrogance of the acquirer. Which means that we are very, very considered and run a very considerable process, whereby we actually take and preserve the value that we're acquiring. And at the same time, if there's things that KBR can bring to the table that add value, then, of course, we want to make sure we integrate that into Centauri. But at the same time, there may be things that they are doing that we can integrate into the rest of KBR. So we -- this is a stand-alone business today. It's highly successful. It's been growing very nicely, in fact, more than very nicely, and we want to make sure we don't disrupt that. So because it's stand-alone, we can actually be very considered and take our time to make sure that we do it in the best possible way with an absolute focus on winning new work and revenue synergy, and we can work progressively through integrating the back office in due time. So I think the integration risk is very low. I think the cultural fit is very strong. I think everyone seems to be talking the same language, which really helps. And at the same time, this is a very well-run business. And I think that all we have to do is actually make sure that we appreciate that and that we're humble in our approach. And at the same time, make sure that we add value where we can. And I think, therefore, with the proven history of doing that, of actually not seeing a dip in performance as we've acquisitively grown. I think we can bring that learning to this acquisition, and I'm pretty sure it will go really well. So I think there's actually low rate integration risk associated with this.

Michael Dudas, Vertical Research.

Maybe for, Mark, first question. A ballpark of integration costs to complete the acquisition all in and secondly, how are you thinking about, given the enhance -- seems like from the numbers you put out much more enhanced the free cash flow generative business. Given your net leverage and where you're positioning now relative to peers, et cetera, how much -- how quick do you feel like you want to pay down debt? Is it something that every excess dollar is going to use to retire? Or because of the structure of the business, you have a little bit more flexibility and keep the balance sheet a little bit more levered relative to paying down after a sizable acquisition.

Okay. Michael, the integration costs are going to be between $5 million and $10 million for this year, assuming we close on the schedule we've discussed, which is Q4, probably early Q4, if things go reasonably on schedule. When we provide '21 guidance, we may have more leaking into the following year of '21, if you will, and we'll provide color around that at the right time because we'll be giving that more thought as we work with our new colleagues at Centauri and the months ahead and make sure that we do a full and complete and thoughtful integration plan. So that likely will continue into '21. But this year's effect is between the $5 million and $10 million. Relative to net leverage, we've pointed out the net leverage level here. I think this is a transformative transaction for a lot of reasons to include how we think about our capital structure, together with the earlier announcements on tech solutions, really lowers the risk profile of the company and further increases our predictability and stability of earnings and cash flow. And so because of that, I think we were very clear that our capital deployment aperture will be wide and should be constructive in '21. And so we may pay down some debt in '21. We may do some buybacks in '21. We may do more M&A. That will depend on the opportunities presented themselves, but we think all 3 are attractive things to do in general. But because capital is so cheap right now, debt reduction has limited upside. And so that will come into our thinking as well.

Well said, Mark. And my follow-up for Stuart. You highlighted in your prepared remarks, the opportunistic, the multiples have come down from the business, the competitors and timing. How long have you had your sights on Centauri? And is this was a process that happened relatively quickly? Is this something where you narrowed down your opportunities to focus on this one and the negotiations came together at a reasonable pace, given all the uncertainty relative to COVID and the expectations of uncertainty? So I just wanted to get a sense of that and how this all came about?

Yes. No. Thanks, Mike. And again, good question. I mean, obviously, we know this industry really well. And our team and really thought through our strategic workshops and things were really long admirer of Centauri for its expertise in space and intelligence and of course, it's significant record of growth. And we've been looking at them for a long while, we've been discussing with them for quite some time. I think as you probably can imagine, this was pre-COVID, stopped and started a little bit due to some uncertainties. And so we've had a very long period of, I guess, what I would call connection. We've managed to have a very strong due diligence process and probably the best that we've had in truth in terms of the ability to interact with management and the quality of data and the data room, et cetera. So feeling pretty good about all of that and coming out of it with a very strong sort of forward-looking purpose.

Tobey Sommer, Truist.

What is the total space exposure of the combined company? And what does -- where does the company rank in terms of the largest vendors to space-focused customers post transaction?

Sure. I mean I think it depends how you define that to -- I mean in terms of NASA, I think we are in the top 2 in terms of intel and military space, I think Byron is probably best to give you a feel for that in terms of the overall KBR. I mean it's $1.7 billion type circa revenue number. Byron in terms of the -- how we stack up against the opposition in intelligence and...

Yes. I would say, definitely in the -- you have to kind of look at different customer sets, but you're correct on NASA, definitely in the top 2. And with the NRO, we'll be in the top 3 there with providing system engineering support. And then I think we've got room to grow in the space force. But this gives us an immediate presence immediately in some of the new space force work coming out of LA and Colorado Springs. So definitely would be a top-tier player across the board.

And I think, Tobey, that's the message. It's -- I mean, I don't really mind if we're number -- I mean, being #1 and #2 is somewhat irrelevant. I think what you have to be is just a top-tier player at scale so that you're recognized for being able to deliver the larger programs, and therefore, you're on the bid slate and the opportunity set that comes forward with these agencies.

Right. How did Centauri perform so far during the pandemic? And could you describe a little bit the relevant things such as how its service is delivered vis-à-vis skips, on-premise, et cetera, and what your due diligence revealed about the resiliency of its performance?

No, that's a really good question and one I ask myself to Byron, so I'm going to let him answer it.

Yes. Their performance has been very strong throughout this COVID environment and I think going from the, as Stuart said, from kind of the first half of 2019, all the way through the first half of '20, they continue to have high to high double-digit growth organically. So they continue to have several big wins and programs around directed energy, around trusted microelectronics. They've recently announced a couple of very large IDIQ wins that give them the potential to grow for the future. So I think they've shown strong growth. Related to COVID, they've had very little impact with the virus itself. They actually own a significant amount of classified facilities especially there in Chantilly. In fact, they have quite a large classified conference center, and they were able to actually set up additional network stations for customers to come into as the customer tried to reduce density in the government site to continue the mission. So they've been able to provide value-added services to their customers throughout this. They do have some people that are on the Cares Act. Just -- but most of their customers have gone through shift work and they separated employees to keep social distancing. I've personally been able to go throughout COVID to their classified facilities to get classified briefs, to see their people working. So they continue to maintain a very high work throughout this process.

We'll take our last question in the queue from Gautam Khanna from Cowen.

Okay. I had a couple of questions. First, can you -- you'd mentioned they own some facilities, is there a big -- how much is the D&A of the company? Just trying to get to EBIT.

Gautam, I will come back to it in a moment.

Okay. You talked about a 15% CAGR at the company. Is that fairly linear every year? It should be around 15% or is there something in particular that's going to make it more front-end loaded or back-end loaded?

I think -- I mean, we've given greater than 15% is actually the number, Gautam. But I mean I think we would see that. We've got more confidence in that number, obviously, just where the work in hand, the closer in it is, and we think that it's fairly linear, but probably more scale to the front end. And we'll give an update on that as we progress with some of these exciting programs and things that Byron talked about earlier.

Gautam, Mark here. Just to back to your question, it's about $5 million per year of DA (sic) [ D&A ], before, of course, the effects of the purchased intangibles that we'll describe to this transaction, but you can model out a middle of the fairway assumption there with these types of deals based on the purchase price, and that should give you a good estimate on that front.

That's very helpful. And also just that -- Centauri is -- it looks like it's done a couple of acquisitions in 2019. And are there any small business or protected set aside type programs that we should be aware of? So like could you talk about those?

Yes. I mean, that's a good question. And I think Centauri come with a very attractive position around that. And again, I'm going to let Byron expand on it.

Yes. So they don't have much small business left in their portfolio. I think there's on the order of 10% or so. But many of those programs are converting to full and open. Many of them have -- they can continue to run them out for multiple years. I think their single largest program is called ATAP II, which has got another 3, 4 years of task order work on it. So there's really no significant risk there. I think you have to remember the nature of their work because it is so classified, oftentimes, small business requirements are not there. So much of what they bought and who they are, didn't have a lot of small business. They didn't have to convert to the big prime as much as other businesses might have. Because in some of those communities, they don't have the same small business requirement. So majority of their work is very much a high-end and prime, full and open type work.

Okay. And I apologize, I just want to get these 2 on the record, these last 2. Can you describe the process? Was it an auction, just a straight up auction with the private equity firm? Or anything you can give us on the background of it?

It was a very collaborative process, Gautam.

Okay. Meaning -- collaborative, but were you -- was it like you guys the high bidder? Or can you speak to...

No. I think the word collaborative is clear. Yes. I mean there's -- I mean, we ended up in a very sort of long-term discussion, just one-on-one.

Okay. And then last one, we can do the measurement of the pie chart, but maybe it'd be easier if you could just tell us percentage fixed price versus cost-plus at Centauri or T&M.

Gautam, it's about 65% reimbursable and 35% T&M essentially...

With this, I would like to turn the call back over to Stuart Bradie for any additional or closing remarks. Over to you, sir.

Thank you. Thanks, Serge. So again, thank you very much for joining us at short notice, and we're very, very excited about Centauri as you can hear from all of us. We do think it's a terrific fit. We do think it's a terrific added value to our shareholders and to KBR in general. So -- but again, really just my thanks for your interest in KBR and taking the time at short notice. No doubt, we'll be talking in follow-up calls in the next little while. So thank you.

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.