Good day, welcome to the KBR conference call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introductions, I would like to turn the call over to Alison Vasquez. Please go ahead.
Thank you, Sergey. Good morning, thank you for joining us. Today, we announce that KBR has agreed to acquire Centauri in an all-cash transaction. The press release and presentation are published on the investor 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 two. 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, thank you all for joining us on such short notice. Today's 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. We expect to close the deal in early Q4. Over the next 30 minutes or so, I'll take you through the why and the why now, 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 Centauri and the amazing capabilities and IP that the great people bring. 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.
Let's begin on slide three with a few takeaways. I want to start by touching briefly on our M&A philosophy, which you've heard me talk about before. When 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. 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, a fundamental, is that one plus one must be greater than two, meaning minimum overlap and a true focus on revenue synergy, thus giving people more and getting them excited about the combination and its potential, rather than worrying if they'll have a job tomorrow. This is all about future-facing, get people excited about the future and its potential.
There has to be strong cultural and values alignment, that's absolutely clear here, as is a firm strategic fit. We'll show you in a moment that Centauri is bang-on strategy. Centauri accelerates KBR further up the space leadership ladder, effectively adding the third leg of military intelligence to our 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.
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. 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. On to slide four. In our Investor Day in May 2019, and again at our recent Government Solutions in 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, 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. On to slide five. Clearly, we believe Centauri is a highly strategic and complementary acquisition, and one that accelerates KBR's vision. Let's spend a moment on why Centauri and why now. 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 is 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. 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, where specialized personnel and the required clearances and facilities and IP are required. 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 times 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. 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. Turning to slide six, let's take a deeper look at their portfolio. Centauri has achieved strong double-digit growth over the last two 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.
Centauri goes to market along three 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. 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 and 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 operates 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 in several critical growth areas, such as trusted microelectronics and the protection of satellites and data, such as our nation's GPS systems.
The middle graph on the bottom shows a balanced 50/50 split between the Department of Defense and the intelligence customers. 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. To slide seven, 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.
Starting in the center of this graph, the basic phases of the Space Domain Awareness mission include identifying, monitoring, characterizing, accepting, 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 objects are in the sky. You have to understand the communication and data links represented in the middle. To the far right, you have to have a knowledge of missile defense and the electronic warfare response infrastructure. 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.
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 deterrence and early warning to tactical communications and intelligence-based decision-making for our war fighters. While this visual provides an overview of the complex space domain mission, slide eight, if you'll 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 Signals Intelligence, Geospatial 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. To slide nine, as Stuart mentioned with our strategic thrust, you can see here the top nine Defense Department priorities for modernization.
Centauri has active and meaningful work across all these critical areas. We've talked in depth about the first three and their 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 the National Air and Space Intelligence Center in Wright-Patterson, Ohio. Here they deliver unique expertise in evaluating foreign space and weapons technologies. 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 merit, high margin, and high barriers to entry. 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. 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. 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. 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. Centauri can leverage those contracts immediately for additional growth with existing customers. Centauri provides us immediate capabilities in the intelligence community, and we enhance each other's win rates. Finally, we're going to come out of this, be a larger and more specialized organization with exciting opportunities for both new and existing employees. 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 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 11 times expected 2021 EBITDA. It's important to again note, as Byron said earlier, 80% of the 2021 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, 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 2.5 times. 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 a half a 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 2021 and 2022, 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 are indeed very scarce, and as such, 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. 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 one to one 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%+, 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. A couple of slides to close. Firstly, some high-level conclusions on slide 13. Obviously, we're 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. As you would expect, these come with strong bipartisan support. Centauri expands KBR's high-end capabilities, broadens our customer relationships. That stickiness 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 align with KBR's strong value-based culture and mission focus. 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.
On to our final slide. 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 attendant 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-$16.5 billion.
We'll provide formal guidance in connection with our fourth quarter earnings. 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 strong line of sight to strong growth in 2021, 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. This helps drive top-tier growth and importantly, cash generation. In the circles charts, 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. Thank you.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Please make sure the mute function on your phone is switched off to allow a signal to reach our equipment. Again, it is star one to ask a question. Andrew Kaplowitz, Citigroup, please go ahead.
Good morning, guys. Congrats on the deal.
Thanks, Andrew.
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's done a couple acquisitions pretty recently, but you put out that 15% CAGR through 2024. I'm 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.
I mean, that key point in the rebids is, I'm glad you reminded everyone of that, Andy. 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. The fact that we think there's very strong synergies, but we've been quite conservative in that outlook, particularly in 2021, just because the pipeline, as you know, is quite mature in government. Are there any key wins that we're sort of hanging on to looking forward? I think the answer to that over the 2021 cycle is no. I think there's significant upside potential from what we're modeling, as you know, it's all about timing and all about securing those wins.
That's why we're feeling pretty strong about this asset in general, the level of secured work, the stickiness of their contracts, the low recompete win rates, and the upside potential that Byron expanded on in things like directed energy, et cetera.
That's great, Stuart. You mentioned pro forma KBR at 9% adjusted EBITDA margins. I guess it just seems a bit conservative given Centauri's double-digit margin. I know you're rounding, I guess what's the potential to do better than that over time? I think you mentioned that 10%+, even in 2021, if your technology business is in recovery and you don't have significant COVID-related disruption.
You've got to remember that when we're giving the EBITDA numbers of our government segment are 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, then we've got our SG&A coming out the bottom of that. I think we're moving up. As we always try to do, we try to give reasonable targets that we like to do better than the targets we put out. I would say this is if you do the math on this, the potential of KBR in terms of EPS growth into next year is significant, even with these margins, Andy.
If we do better than that, we'll do even better than what's on the sheet, obviously.
Very helpful. 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.
Thanks. Congrats again.
Thanks, Andy.
Thank you.
Jerry Revich, Goldman Sachs, please go ahead.
Hi, sorry again, good morning, everyone.
Hey, Jerry.
Hey, Jerry. I wonder if we could just maybe put some numbers around the opportunities you folks laid out on slide 10 of the presentation in terms of ability to drive up platform growth in frame opportunities. Look, yeah, just for Mark and talk about how do you feel about the platform opportunities here, within the context of the prior deals that you folks have completed.
Yeah. Jerry, you're quite hard to hear there. You're breaking up a bit. I heard 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 can accelerate that somewhat with our IDIQ contract vehicles, we've taken a very conservative view in 2021. We do think progressively through to 2024 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. That would be increasing through the term. 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.
Quite attractive, very exciting across multiple areas, we really think this is terrific.
That's a sizable number. Then, nice to see the margin targets increase for the segment as a whole, which certainly points to a higher confidence that you folks have on the sustainability of margins that you've been delivering for the base platform. Can you expand a minute about that? Because I know you were setting a more conservative tone at the Analyst Day, maybe touch on what gives you the higher confidence in raising the margin outlook for the base GS platform.
I think you've got to remember when we did the GS in Focus Day was really we kind of leaned forward and did Analyst Day just after COVID and lockdown, I think there was still some views there in terms of it better to be somewhat, the uncertainty and just how things are going to play out. I think we've really seen our government customers lean forward. Our business continues to deliver at those sort of higher-level margins. Centauri is really additive to that. 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 they'll be double-digit plus going forward.
Okay. Thank you. 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. I think we have to close this and take stock. What I would say is that our net leverage level, as Mark said, at 2.5 times is still very much in the-- it's actually lower than our peer group in the government segment and reflecting the risk profile across that segment. We feel pretty good about where we sit. I do think there's capital deployment opportunities, whether that be in M&A or buybacks as we move into next year. We've got to let the dust settle on this. We've got to focus on the value creation that this brings. Again, from the last slide that I presented, you can really see the shape of what new KBR is in this transformed area.
It really sort of demonstrates that if we get this right, the levels of growth are significant and very attractive, both organically and accretively. I think that's going to be our focus. As I said, we will have capital deployment opportunities into 2021 given our current leverage ratio. I think it all sets up nicely, but it's difficult to find assets that fit as well as Centauri. This is a rare opportunity to buy something in the intelligence and classified arena that has very little overlap, 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. We're really thrilled with those 750 people that are coming on board.
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. I think the immediate focus is on integrating this properly and realizing the value as we've laid out.
Okay. I appreciate the discussion. Thank you.
Steven Fisher, UBS. Please go ahead.
Great. Thanks. Congratulations on the deal. Just wondering how we should think about that accretion beyond 2021. Not sure if you're able to kind of put any numbers around it, but relative to the $0.25-$0.30 in 2021, as we think about, say, 2022, should that accretion be growing with kind of a consistent rate with the 15%-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 think, Steven, we're not giving official guidance here. I think you've got to wait till Q4 for that. We've tried to lay out what it means in 2021. We've also given you the CAGR that goes along with it, and I think that's a good starting point. This is a business that has been growing well above double digit in the last few years and continues to do so as we move into next year, and we expect that growth cadence to continue. Again, with synergies, it's going to be highly attractive. We're not today giving numbers around what we're going to do in 2022, and we need to think through the longer-term targets and just how that all fits together. I do think that ultimately, I saw your little note this morning, and it's interesting what you think we'll get in 2022.
I think we'll be aiming to do a bit better than that.
That's helpful. Obviously, 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. 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? If you don't get that, does then that make you think about perhaps some strategic alternatives for the technology business?
Yeah. 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. 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 a space franchise. We're very excited about that. If we don't realize the value, then obviously we have to pull other levers, Steve. Again, I've been very clear about that from an unemotional shareholder value perspective, that's our job.
Terrific. Thanks very much.
Sean Eastman, KeyBanc Capital Markets, please go ahead.
Hi, team. Congrats on the deal, and thanks for taking my questions. 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 nine, just across the Centauri capability set, if there's one or two elements there where that synergy potential is concentrated or whether it's just across the whole portfolio. Then maybe if you could just touch on, just backward looking on SGT, HTS, Wyle, what you guys have been able to achieve there from a revenue synergy perspective, maybe relative to your initial expectations. That'd be a good discussion.
Okay. I'm going to answer the second question, I'm going to do that first to give Byron a chance to answer the first question so he can think about that answer. From a SGT, Honeywell, and Wyle perspective, we have realized synergies there well beyond expectation.
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. That's absolutely been the case. We've certainly increased our P win ratios. We're winning sort of things like the MOSSI contract recently in Huntsville. We could never have done that as a standalone KBR entity. 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 the special forces where we had other types of relationships historically and putting those together to take that deal away from Booz.
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. I think we've demonstrated leading organic growth in the government services segment without exception over the past few years, 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. I think we've proven that our acquisition thesis excites people and gets them focused 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. 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 spades. I'll let Byron answer the first part of your question, Sean.
Thanks, Stuart. Great question. I think in general, there are many areas of synergies that excite us. I think right out of the gate, Centauri, because of 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. KBR has a really strong business development program and team, we talked a lot about that at the GS IR event. Centauri doesn't have contracts like OASIS and IAC MAC and RS3 and all of these IDIQs. Kind of across the board with existing customers in Centauri, they're going to have the immediate ability to offer their customers various contracts to get task order work on. That's probably the first synergy that I think we can get some real quick wins on.
From a technical standpoint, I think the things that excite me is the combination of the capabilities we have at NASA. I mean, we've got significant satellite network, ground station support work. That fits very nicely with Centauri's push into the U.S. Space Force and Space and Missile Center down out of L.A. We also have complementary skill sets at the Air Force Research Lab. Again, those are areas I think where 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. When I think of KBR and our engineering business, I think platforms, the F-18, the big Patriot missile systems.
Where they're more in the electronics and the algorithms and the physics-based modeling and the satellites, KBR's got more of the traditional kind of aircraft and platform and UAVs. Together, this whole area of C4ISR integration and this nexus between the artificial intelligence and software is where I think we'll find some really strong synergies.
Excellent. Really helpful. 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 whether there's any integration risk associated with that $0.25-$0.30 accretion forecast for next year.
Yeah. Again, very good question. I think we've got quite 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. 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 considered process whereby we actually take and preserve the value that we're acquiring. 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. At the same time, there may be things that they're doing that we can integrate into the rest of KBR. This is a standalone business today.
It's highly successful. It's been growing very nicely. In fact, more than very nicely, we want to make sure we don't disrupt that. Because it's standalone, 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. We can work progressively through integrating the back office in due time. 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. At the same time, this is a very well-run business. I think that all we have to do is actually make sure that we appreciate that and that we're humble in our approach.
At the same time, make sure that we add value where we can. I think therefore, with a 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'll go really well. I think there's actually low integration risk associated with this.
Very helpful perspective. Thanks for the time, gentlemen.
Thanks.
Michael Dudas, Vertical Research. Please go ahead. Good morning, gentlemen. Good morning, Alison.
Good morning, Mike.
Good morning, Michael.
Michael, maybe for Mark, first question, any ballpark of integration costs to sort of complete the acquisition all in? Secondly, how are you thinking about, given the enhanced—seems like from the numbers you put out, much more enhanced, the free cash flow generative business. Given your net leverage and where you are positioning now relative to peers, et cetera, how quick do you feel like you would want to pay down debt? Is this something that every excess dollar is going to be used to retire, or because of the structure of the business, you will have some 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 2021 guidance, we may have more leaking into the following year, 2021, 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 in the months ahead and make sure that we do a full and complete and thoughtful integration plan so that likely will continue into 2021. 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. Because of that, I think we were very clear that our capital deployment aperture will be wide and should be constructive in 2021. We may pay down some debt in 2021. We may do some buybacks in 2021. We may do more M&A. That'll depend on the opportunities presented themselves, but we think all three are attractive things to do in general. Because capital is so cheap right now, debt reduction has limited upside, and so that'll come into our thinking as well.
Well said, Mark. 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? Was this 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? I just wanted to get a sense of that and how this all came about.
Yeah, no. Thanks, Mike. Again, good question. Obviously, we know this industry really well and our team and really through our strategic workshops and things, we've really long admired Centauri for its expertise in space and intelligence and of course, its significant record of growth. 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 and sort of stopped and started a little bit, due to some uncertainties. We've had a very long period of, I guess, what I would call a connection. We've managed to have a very strong due diligence process, probably the best that we've had, in truth, in terms of the ability to interact with management and the quality of data in the data room, et cetera.
Feeling pretty good about all of that, and coming out of it with a very strong sort of forward-looking purpose.
Appreciate that, Stuart. Thanks. Thanks, guys.
Michael.
Tobey Sommer, Truist. Please go ahead.
Thank you. What is the total space exposure of the combined company, and where does the company rank in terms of the largest vendors to space-focused customers post-transaction?
I think it depends how you define that, Tobey. In terms of NASA, I think we are in the top 2. In terms of Intel and military space, I think Byron's probably best to give you a feel for that. In terms of the overall KBR, it's $1.7 type billion type circa revenue number. Byron, in terms of how we stack up against the opposition in intelligence and-
Yeah. I would say definitely, you have to look at different customer sets, but you're correct on NASA, definitely in the top 2. With the NRO, we'll be in the top 3 there with providing systems engineering support. I think we've got room to grow in the Space Force. This gives us a meaty presence immediately in some of the new Space Force work coming out of L.A. and Colorado Springs. Definitely be a top-tier player across the board.
I think, Tobey, that's the message is, I don't really mind if we're number 1. Being number 1 or number 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.
How did Centauri perform so far during the pandemic? Could you describe a little bit the relevant things such as how its service is delivered vis-a-vis shifts on-premise, et cetera, and what your due diligence revealed about the resiliency of its performance?
That's a really good question, and one I asked myself to Byron, so I'm going to let him answer it.
Yeah. Their performance has been very strong throughout this COVID environment, and I think, going from, as Stuart said, from kind of the first half of 2019 all the way through the first half of 2020, they've continued to have high double-digit growth organically. They've continued 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. 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 networked stations for customers to come into as the customer tried to reduce density in the government sites to continue the mission. 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, but most of their customers have gone to shift work, and they've 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. They've continued to maintain a very high work throughout this process.
Thank you.
We'll take our last question in the queue from Gautam Khanna from Cowen. Please go ahead.
Okay. Thank you, guys. I had a couple questions. First, you'd mentioned they own some facilities. How much is the D&A of the company? Just trying to get to EBIT.
I'm going to come back to you on that one 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?
Oh. We've given greater than 15% is actually the number, Gautam.
Yeah.
I think we would see that we've got more confidence in that number, obviously, just with the work in hand, the closer in it is, and we think that it's fairly linear, but probably more scaled to the front end. We'll give an update on that as we progress with some of these exciting programs and things that Byron talked about earlier.
Yep. Okay.
Gautam, Mark here. Just to go back to your question, it's about $5 million per year of D&A before, of course, the effects of the purchase and tangibles that we'll ascribe to this transaction. 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. Thank you. Also, just that Centauri, it looks like it's done a couple acquisitions in 2019. Are there any small business or protected set-aside type programs that we should be aware of? Like, getting awarded by those.
Yeah. That's a good question, I think Centauri come with a very attractive position around that. Again, I'm going to let Byron expand on it.
Yeah. They don't have much small business left in their portfolio. I think there's on the order of 10% or so. Many of those programs are converting to full and open. Many of them they can continue to run them out for multiple years. I think their single largest program is called ATEP 2, which has got another three or four years of task order work on it. 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. 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 requirements.
Majority of their work is very much a high-end and prime full and open type work.
Okay. I apologize, I just want to get these two on the record, these last two. 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, was it like you guys the high bidder? Can you speak to
No. I think the word collaborative is clear.
Okay. Fair enough.
Yeah. We ended up in a very sort of long-term discussion, just one-on-one.
Okay. Last one, we can do the measurement of the pie chart, but maybe it'd be easier if you could just tell us % fixed price versus cost plus at Centauri or T&M.
Gautam, it's about 65% reimbursable and 35% T&M, essentially.
Okay.
Maybe 60%, 30%.
Thank you very much, guys. Appreciate it.
Yep. You're welcome.
Thank you. 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, Sergey. Again, thank you very much for joining us at short notice. We're 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. 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. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.