Jacobs Solutions Inc (J) — Q2 2019 Earnings Call Transcript

Good morning and afternoon to all. Our earnings announcement was filed this morning, and we have posted a copy of the slide presentation to our website, which we will reference in our prepared remarks. I would like to refer you to our Forward-Looking Statement disclosure, which is summarized on Slide 2. Certain statements contained in this presentation constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, and such statements are intended to be covered by the Safe Harbor provided by the same. Statements made in this presentation that are not based on historical fact are forward-looking statements. Although such statements are based on management's current estimates and expectations and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain, and you should not place undue reliance on such statements as actual results may differ materially. We caution the reader that there are a variety of risks, uncertainties and other factors that could cause actual results to differ materially from what is contained, projected or implied by our forward-looking statements. For a description of these and other risks, uncertainties and other factors that may occur that could cause actual results to differ from our forward-looking statements, see our annual report on Form 10-K for the year ended September 29, 2018, and our quarterly report on Form 10-Q for the second fiscal quarter of 2019 which is filed this morning. We are not under any duty to update any of the forward-looking statements after the date of this presentation to conform to actual results, except as we are required by applicable law. During the presentation, we will be referring to certain non-GAAP financial measures. Please see Slide 2 of this presentation for more information on these figures. In addition, during the presentation, we will discuss comparisons of results to prior periods on a pro forma basis. See Slide 2 for more information on the calculation of these pro forma figures. We have provided historical pro forma results in the appendix of the investor presentation. We believe this information helps provide additional insight into the underlying trend of our business when comparing current performance against prior periods. Now turning to Slide 3 the agenda. Steve will begin by discussing the aerospace technology and nuclear ATN line of business leadership transition we announced last week. Then move to the highlights on our cultural initiatives then provide a recap of our second quarter results, including a market review of our business. Kevin will then provide some more in-depth discussion of our financial metrics then provide an update on our M&A costs and synergies as well as review our balance sheet and cash flow. Finally, Steve will provide an updated outlook along with some closing remarks and then we will open up the call for your questions. With that, I will now pass it over to Steve Demetriou, Chair and CEO.

Thank you and welcome to our fiscal year second quarter 2019 earnings call. Before we begin on Slides 4, I would like to discuss the aerospace technology and nuclear ATN line of business leadership transition that we announced last week. After more than 30 years of exceptional leadership at Jacobs' across multiple businesses and operations, Teri Hagen, COO and president of ATN has decided to begin transitioning for retirement. Over the last several years under Teri's leadership, our ATN line of business has developed a deep bench of leaders with proven execution capabilities and a roadmap for continued strong profitable growth. And while I will miss Teri's incredible leadership on top of ATN, we are in good hands with the strong set of ATN leaders across the globe. I'm very excited that Dawne Hickton has agreed to become the COO and president of ATN, replacing Teri effective June 3rd. Dawne, who stepped down last week as a director of our board to take the stake of executive positions, she is the former vice chair and CEO of RTI International. She has built numerous relationships across the aerospace industry, brings strong business acumen and has a track record of shareholder value creation. And most importantly, Dawne is an inspirational leader who fits well with our ATN organizations and government services client base. She comes to ATN with momentum. For example, Dawne was engaged in the development of our new Jacobs' strategy that was presented at Investor Day. And she was also involved in the due diligence and decision to acquire KeyW. As Dawne takes over the leadership of our global ATN business, Teri will become executive strategic advisor reporting to me. Teri will lead the KeyW integration process working closely with Dawne and the ATN leadership team. Turning to Slide 5, our second quarter results demonstrated continued momentum toward achieving our 2019 outlook. And our first half performance is a strong start toward ultimately realizing our 2021 strategic targets. On a year-over-year basis, second quarter net revenues grew 9%. Operating profits increased significantly, and our adjusted EPS of $1.19 was up 37%. On April 22nd, we announced the acquisition of KeyW, a leading federal technology provider. And then on April 26th, we closed the sale of our energy, chemicals and resources business. These strategic actions represent key steps in the continuing Jacobs’ transformation to provide clients solutions that are aligned with secular growth trends, such as space, urbanization, sustainability, and the convergence of information and operational technology. Also, the CH2M acquisition continues to be successfully executed and revenue synergies are now materializing in our backlog. I'm very proud of our organization’s ability to drive these significant and transformative initiatives while staying focused and delivering strong second quarter financial results. We are driving a culture of innovation and accountability deep into the foundation of our Company, which will propel our success even further as our markets evolve. Now on to Slide 6 to discuss our focus on culture and specifically our talent. Jacobs’ employees are our most important asset, and therefore we are relentlessly focusing on attracting, retaining and developing the world's best talent. Talent retention is a business imperative, and I have made it a personal goal to further increase our industry-leading employee retention rates. We believe higher retention is a multifaceted approach that consists of top-down inspirational leadership, clarity of strategy throughout the organization, an inclusive and diverse workplace so all employees feel engaged and empowered, and innovative and entrepreneurial opportunities for our employee development. Let me share two examples of our focus on creating a healthy and attractive workplace. First, this week at Jacobs is Safety Week. We use Safety Week to refocus our commitment to be leaders in health and safety, both physical and mental. Throughout this week across the globe we will raise awareness of key health and safety topics, engaging our workforce, clients, contractors, family and friends by sharing information, ideas, and celebrating success. As evidenced by our diversity initiatives gaining traction, I'm excited to share that Jacobs was recently awarded the highest designation by the Human Rights Campaign Foundation for LGBTQ equality at 100%. This is something that we are immensely proud of. We truly believe that our focus on our cultural priorities creates an environment where all employees can bring their whole self to work, enabling them to thrive, innovate, and ultimately solve critical challenges for our clients. Turning to Slide 7, let's discuss another key component of our strategy: innovation. At Investor Day, we outlined a strategy for accelerating innovation, part of which were investments in five focused areas of cybersecurity, applied geospatial science, automated design, internet of things, and predictive analytics. Our announced acquisition of KeyW directly aligns with this strategy by strengthening our capabilities in these areas. In addition, KeyW's Intelligence Surveillance and Reconnaissance team brings new capabilities to Jacobs with proven technology relied upon by the intelligence community and associated government agencies. Now, let me recap the strategic rationale and benefits of the KeyW acquisition on Slide 8. KeyW's ISR business is leading-edge, and they are differentiated by their ability to deliver at a faster pace and lower cost than traditional space ISR providers. Jacobs brings the global platform and financial resources needed to materially accelerate KeyW's trajectory in the multi-billion dollar space intelligence industry. Jacobs’ Enterprise IT and defensive cyber capability complemented by KeyW's mission IT and offensive cyber capability will enable us to offer the full spectrum of IT services. Jacobs’ existing clients already recognize us as a trusted provider of solutions to their most critical problems, and combined with KeyW's workforce, we will be able to translate what they do into other equally challenging environments. Whether it's new sensor and communication enhancements for smart city, geospatial or water security clients, cyber training and assessments to support our Department of Defense, Department of Energy, and NASA clients, or secure infrastructure technology for building infrastructure business. We will be able to deploy enhanced capabilities that benefit our current clients and springboard KeyW's growth into adjacent high-value sectors. Now moving on to a review of each line of business on Slide 9 starting with aerospace technology and nuclear or ATN. During the quarter, our ATN business continued to outpace the growth of the market with 15% year-over-year revenue growth. ATN backlog continues to grow in the second quarter, up 2% versus last year to $7.3 billion. As previously noted, we are approaching two major ATN rebids, the Hanford Plateau remediation contract and a confidential contract with the U.S. Government. These contracts are generating revenue without a corresponding increase in backlog. And when adjusting for the impact of these two contracts, which we expect will have favorable outcomes, backlog growth would have increased 4%. Furthermore, second quarter backlog does not include the upside from a $785 million Army HTASC award which has now cleared protest and will enter our backlog in the third quarter. Also, approximately 85% of bookings during the quarter were from new business, and when considering the full value of our contracts, including options and expenses, ATN's backlog would be more than 50% larger than the $7.3 billion recorded in the second quarter. As I just mentioned, during the second quarter we had the large U.S. Army HTASC win under this seven-year $785 million single award IDIQ 2 contract. Jacobs will support the Army Training Intelligent Center of Excellence, including hands-on practical performance and simulated virtual training for the overarching training support missions of the U.S. Army. We are also continuing our work on the Patriot Excalibur Software and Systems Engineering for the U.S. Air Force. This renewed five-year $84 million contract provides software solutions to conduct real-time operations and tracking of mission readiness. Continuing along the lines of high-end government contracts, we were awarded the Department of Homeland Security Intrusion Prevention Security Services contract. This is a $31 million contract that enhances cybersecurity analysis, situational awareness, and security response to the Department of Homeland Security. Also during the quarter, we supported the first-ever salvo test of the Ground-Based Midcourse Defense System involving two interceptors against an intercontinental ballistic missile conducted by the Missile Defense Agency. We provided integrated solutions to support the test in all phases launch, ground, sea, and space sensors providing real-time target acquisition and tracking operation of the command control battle management and communication system, and finally target discrimination and ground-based launching intercept. In our salvo portfolio, we received an 18-month contract extension at the Department of Energy Savannah River Site. This contract is part of the environmental management portfolio where Jacobs has strong leadership. Bids have now been submitted for multiple contracts at the DOE's Hanford site. For the Hanford Central Plateau contract, where Jacobs is currently the majority JV partner, we have submitted as a minority partner. If successful as a minority partner, we will only recognize our portion of a fee from the joint venture. However, on the Hanford tank farms, we bid as the majority joint venture partner, which would be a new win and add material revenue and incremental operating income. Finally, as part of our international portfolio, we are a shareholder in AWE Management Limited, which operates the Atomic Weapons Establishment, AWE in the UK. AWE has secured the next phase of the program, which covers the next three years, successfully continuing the operating profit contribution to the ATN bottom line. In summary, the ATN business had outstanding performance in the second quarter of fiscal 2019. And looking forward, we are excited about our record-high $30 billion pipeline of new opportunities. We are focused on growing high-quality operating profit with emphasis on mission-critical government programs that bring resiliency to our business. We are optimistic that our strategy, which combines strong technical expertise, a unique localized delivery model, and an industry-leading efficient cost structure will allow us to continue to gain share over time. Now turning to Slide 10, to discuss the performance of our Buildings, Infrastructure and Advanced Facilities BIAF line of business. BIAF maintained a solid growth trajectory with second quarter net revenue up 5% and operating profit up 9% year-over-year. This strong performance was driven by continued positive momentum across all our industry sectors and further optimization of CH2M integration synergies. North America had solid top-line growth outpacing the market. In the UK, despite geopolitical headwinds, we see continued capital commitments for infrastructure. And similarly, in the Middle East, our business remains strong. In Australia, New Zealand we continue to experience some softness, but we made solid progress against our sales forecast with key bookings across the geography. Our second quarter BIAF backlog was up 11% year-over-year to $13 billion. Backlog growth can be attributed to capitalizing on CH2M revenue synergies. Traction with our BIAF global delivery model, contract extensions on several long-term engagements, and large-scale wins in our advanced facilities business. Operating profit margin as a percent of net revenue grew 40 basis points to 12%, demonstrating our continued drive towards a higher value solutions-based portfolio. As we look across the BIAF industry, we see strong and steady growth in our key infrastructure sectors, specifically in the life sciences and electronics. Capital spending in the U.S. life sciences sector is increasing, and electronics CapEx investments continue to be strong globally to support future demand for leading-edge products. Two significant wins this quarter include a confidential vaccine manufacturing plant in the Southeast U.S. and the design of a micro-processing chip manufacturing plant in the U.S. The U.S. Federal sector continues to have a promising outlook, reporting several wins, including IDIQ contracts with the Army Corps of Engineers and the U.S. Department of State Bureau of Overseas Buildings Operations. At the Climate Leadership Conference in March, I was honored to accept multiple awards on behalf of Jacobs from the Environmental Business International Group for our leadership and technology environmental restoration, remediation, and climate adaptation. We anticipate healthy growth by leveraging our environmental services as an enabler across all infrastructure sectors. Our transportation business continues to perform well globally. Our ports and maritime business experienced the highest growth driven by the expansion of global container terminal operators in containerized bulk shipping. In aviation, we have a strong pipeline of opportunities in the U.S. as well as the rapidly expanding market in Europe and Southeast Asia. We had significant contract wins with MetroLink's Rail in Toronto and a one-year contract extension for Heathrow's runway expansion. Our water business remains strong with solid year-on-year growth and continued recognition as a global innovation leader. We were recognized by the global water summit with various awards, including the Global Desalination Project of the Year for two last desalination facilities in Singapore. As we mentioned at Investor Day, information technology and operational technology are converging. We believe those that can combine digital expertise and domain knowledge will take share. An example of where we are leveraging our domain knowledge and digitally enabled solutions is a recent win for confidential clients where we are developing the cyber defense architecture for protecting their operational technology attack surface. Another key strategic win was an Artificial Intelligence Transportation Control System with Delaware Transportation Management that collects and analyzes high-resolution data to disseminate real-time travel information to generate traffic congestion solutions. In summary, our BIAF business continues to outpace the market, including double-digit backlog growth. We are well positioned for strong growth for the remainder of fiscal year 2019. Now, I will turn the call over to Kevin to discuss our financial results in more detail.

Thank you, Steve. Before we view our results, let me comment on KeyW's results which were also filed today. As you might imagine, we had the opportunity to review KeyW’s preliminary March quarter results prior to signing of the acquisition agreement. We are encouraged by the progress the Company has made with key project extensions and new awards. As a result, the Company has strengthened its growth profile with backlog up over 10% year-over-year when excluding the impact of the discontinued flight services contract. The Company reported $1.6 billion in proposals submitted and awaiting award, up 23% versus the year-ago quarter. We remain confident in achieving the financial outlook we outlined at announcement and are excited to welcome the KeyW team to Jacobs. Let me also comment on our pro forma adjusted figures that have been included in our appendix to this presentation. We have updated and provided results for all quarters in fiscal 2018 and 2019 on a consistent basis. We have done this to ensure clarity as to how the business is performing on a comparable basis year-over-year. I will be referring to these figures throughout my remarks. So now I will discuss a more detailed summary of our financial performance for the second quarter of fiscal 2019 on slide 11. Second quarter gross revenue increased 8% year-over-year with net revenue up 9%. Both ATN and BIAF contributed to the strong growth profile with ATN leading the way with a 15% increase versus a year-ago quarter. Please note that we expect our second half year-over-year total net revenue growth to moderate somewhat. Second quarter adjusted gross margin as a percentage of net revenue was 24.9% that was impacted by a higher mix of ATN revenue during the quarter, which carries, as you know, a lower gross margin. Our adjusted G&A, as a percentage of net revenue was down nearly 200 basis points year-over-year as we benefited from CH2M cost synergies and our relentless focus on maintaining an efficient cost structure. GAAP operating profit was $103 million, that included $94 million of restructuring and other costs related to the acquisition of CH2M and the divestiture of ECR. $19 million of amortization from acquired intangibles, and $6 million in outstanding costs from our ECR divestiture to be eliminated or reimbursed through a Transition Services Agreement. Adjusting for these items, adjusted operating profit was $222 million, up 27% versus a year-ago period. Our adjusted operating profit to net revenue, our new margin metric announced at a recent investor day was 9% and up 130 basis points from the Q2, 2018 figure of 7.7%. Adjusted EBITDA was $250 million or 10.2% of net revenue. GAAP EPS from continuing operations for the quarter was $0.82 and was impacted by the after-tax per share amounts I outlined earlier about when discussing operating profit. And it was also impacted by some items below the operating income line. GAAP EPS was further impacted by $0.10 of after-tax interest expense associated with debt that was paid down with the ECR sales proceeds, a $0.27 benefit from a non-tax deferred tax adjustment related to the ECR sales, and a one-time $0.18 benefit primarily associated with a settlement gain associated with the closure of CH2M Retiree Medical Plan. Excluding all of these items, including operating profit and below operating profit adjustments, second quarter adjusted EPS was $1.19. This figure benefited from $0.03 due to a lower tax rate. For the year, we now expect our effective tax rates to trend down to slightly below the 25% level we had previously guided to. Finally, turning to our bookings during the quarter. Our pro forma book-to-bill ratio was just over 1.1 times for both the trailing 12 months period and the quarter. The pipeline of opportunities across both businesses is strong and as Steve mentioned, we are beginning to see revenue synergies from CH2M materialize in our backlog. Regarding our line of business performance, let's turn to Slide 12 and begin with ATN. Revenue for ATN grew 15% year-over-year. But please note that the revenue mix in the quarter had a lower associated unit profit margin associated with some of the larger enterprise contracts during the quarter. As a result, the operating profit margin for the quarter was 7%. Longer term, we continue to expect operating profit margins to improve in ATN as we shift the portfolio to a higher value mix. It is important to note that our focus remains on driving operating profit growth versus revenue growth given factors that include a structure of joint ventures, which can actually impact how revenue may or may not be reported on our P&L. We believe operating profit growth is the best indicator of performance, and we continue to expect an over 10% operating profit compound annual growth rate through 2021. Moving to BIAF. The second quarter BIAF grew net revenues 5% year-over-year, and pro forma operating profit was up to 9%. Operating profit as a percentage of net revenue was over 12.3% for the quarter, up 45 basis points on a pro forma basis from the year-ago period. While we are pleased that BIAF’s operating profit margin during Q2 was at the high-end of the target provided at our recent Investor Day, it's important to note that on a quarterly basis, the profitability can fluctuate depending upon the revenue mix in the quarter. Regardless, we are confident in the margin expansion for BIAF from a combination of leveraging the benefits of scale from our global model, strong project execution, and higher margin opportunities currently in our pipeline. Finally, our non-allocated corporate overhead costs were $25 million for the quarter, down $17 million from Q2 2018, driven by the realization of CH2M cost synergies. We continue to be focused on driving cost-effectiveness into our corporate-related cost structure, especially now that we have divested ECR business. Let's turn to Slide 13, where I would like to update our initiatives relative to our one-time costs, and expected synergies related to our recent transactions. As you know, the Company has undergone significant transformation over the last two years, including the $3.3 billion acquisition of CH2M, and the $3.3 billion divestment of our energy, chemicals, and resources business. In addition, we recently announced the pending acquisition of federal technology provider KeyW. All of these actions are clearly resulting in a higher margin, higher growth Company with more predictable cash flows. Let me provide an update on each starting with the CH2M integration and cost synergies. We achieved a run rate of more than 90% of expected CH2M synergies as of Q2, 2019 and continues to anticipate achieving our synergy run rate target of $175 million as we exit fiscal 2019. Through Q2, we have incurred approximately $250 million of the expected $265 million in costs to achieve these synergies. We remain on track to significantly outperform our original synergy estimates. Turning to ECR. As you know, the divestment of ECR closed on April 26, 2019. As a result, we received $2.6 billion in net pre-tax cash proceeds on that date. We now expect $200 million of one-time ECR related transaction, separation, and restructuring costs to reflect the shift to a two-line of business Company. During the quarter, we incurred $40 million of these one-time costs comprised mainly of IT and labor to achieve separation. We expect all costs to be incurred by the end of the calendar year. Finally, as outlined when we announced the KeyW acquisitions, we expect to achieve $15 million of run rate cost synergies by the end of fiscal 2020 with approximately $25 million of cost to achieve those synergies. Additionally, we expect approximately $16 million of transaction fees and other one-time acquisition-related costs. Now on to the cash flow generation and the balance sheet on Slide 14. During the quarter, free cash flow from continuing operations, excluding restructuring, integration, and deal-related costs, totaled over $200 million. Free cash flow substantially improved in the quarter from our Q1 figures as our focus on driving improved cash flow gained traction. Certainly part of that improvement was driven by improved DSO levels. Although, there still remains more work to be done. We remain confident that the elevated DSO figures that we saw in Q1 were a short-term issue and not related to any structural changes in our normalized levels of day sales outstanding. In fact, we continue to expect to see a reduction in DSOs for the second half of fiscal 2019. During the quarter, capital expenditures totaled $39 million, of which nearly $15 million was associated with non-recurring IT and real estate restructuring related to our cost synergy efforts. As a result of our improved cash flow, we ended the quarter with cash of approximately $900 million and a gross debt level of $2.8 billion. On April 26th, we received 2.6 billion in pre-tax net cash and approximately $600 million of order equity. We expect to pay approximately $500 million to $550 million in cash taxes and $200 million of transaction, separation, and restructuring costs related to this transaction. As a result, on an after-tax and fee basis, we expect $2.5 billion in proceeds from ECR, including the Worley equity stake. So looking at the right side of the chart, when accounting for the proceeds from the sale of ECR and the upcoming cash outflow related to the acquisition of KeyW. We expect Q2 pro forma net debt, assuming full taxes paid on the ECR transaction, to be approximately $400 million or well under one-time adjusted EBITDA. Regarding our accelerated share repurchase, we expect the ASR to be completed in June with the delivery of the remaining 20% of the shares of the ASR. At that time, we will evaluate further future share repurchases. And finally, given our strong balance sheet and continued expectation of improved cash flow, we also announced our quarterly dividend is $0.17 per share and as you know, our dividend represents an increase of 13% versus our year-ago dividend level. Now, I will turn it back over to Steve for some closing thoughts.

Thank you, Kevin. I'm very pleased with our solid start to the first half of 2019 and the strong demand environment we are seeing within our core industry sectors. We have an ambitious strategic vision for Jacobs, a strong track record of execution, and a disciplined philosophy of allocating capital. The combination of which we believe is paramount to delivering above-market returns for our shareholders. As we look forward, we continue to expect fiscal 2019 adjusted EBITDA to be in the range of $920 million to $1 billion and we are increasing our total fiscal year 2019 adjusted EPS guidance to $4.45 to $4.85 per share from our previous guidance of $4.40 to $4.80. Operator, we will now open the call for questions.

Can you hear me now?

Yes.

Just give one of your competitors successfully changed its gets code designation. You know what would be the timeline for Jacobs to potentially make a similar transition?

Well as you know, the makeup of our revenues currently are associated with the BIAF and ATN and our government services piece of that represents a smaller proportion of the total revenue base right now. We are in the process of further evaluating a recharacterization of some of our revenues which we know have either government services and or IT related activities, which ultimately will translate into our ability to probably near the end of this fiscal year be able to talk to S&P in order to look to try and change our next gets code longer term. And I think that is going to be a work in progress that we are going to be working on over the next six months.

Okay. Great thanks. And then just on the free cash flow and the DSOs, what do you think a normalized level including KeyW looks like and then will the new design centers in Poland and elsewhere have any impact on the DSOs positive or negative?

Ultimately, we believe that we should be receiving a conversion against net income, which translates into one-times and we think that that is the viable view of how our cash flows will be driven long-term, including KeyW. And I think KeyW will ultimately be accretive to what we are able to do primarily because of the higher margin profile that we are expecting out of that business longer term. As it relates to let's call it our Global Business Services efforts, the more that we can get structured and disciplined as it relates to our processes, which DBS will ultimately be a big part of the better our ability to drive down the DSOs will be. So we would expect that longer term that is going to be a positive versus our ability to continue to drive improved profitability for the quarter or for the years going forward.

Great. I appreciate the color.

Good morning. Thank you for taking my question. Want to say congrats to Teri on his pending retirement and I look forward to working with Don going forward. So first question is perhaps for Kevin. So you reiterated the adjusted the EBITDA guidance for FY 2019. Q1 came in at more than 25% of the year at the midpoint. Can just talk about where you may be conservative versus if there is anything that is trending downward in the rest of the year?

Look, I think what we have done is we have included a raise to our guide $0.05, let's call that primarily around taxes. We still feel good about the ramp-up in the second quarter. And effectively, we think that our ability to drive our growth in the second half, which is substantial, is still there. So I think we are just being prudent as it relates to our ability to continue to deliver against the numbers that we have provided to you.

Okay, great. Second question is on KeyW, their results also came out this morning that was kind of below where the street expected. Can you just talk about, maybe into the second half of the calendar year if there is anything that is changed versus your expectations?

Good morning Lucy. We are confident in the projections that we put in place that model the acquisition including 2019. We see a timing situation going on with KeyW that some awards get pushed into the second quarter and second half of the year. We have been following it closely, and we believe the second quarter is going to be a very solid quarter; there have been some good wins that they should be announcing soon. And so we are confident in the remainder of 2019.

Good to hear. And finally, just wanted to see if there is any changes in the recompete timing just for two large ones that you have highlighted, and I will pass it on. Appreciate it.

The confidential contract that we have in ATN continues to move to the right, which is good for us. We believe that there is going to be some expansion opportunity there over the near-term. And then, I mentioned, I think the other one, you are talking about a Sanford we are excited because we are actually involved in two programs there the rebate as well as the new tank farm opportunity. So, we continue to feel very positively about those and other opportunities. I think I mentioned earlier that our pipeline is a record high $30 billion in the ATN business. And then we are very excited about the pipeline and KeyW, and a margin improvement there that it’s going to bring to Jacobs. So all-in-all, a great pipeline going forward.

Good morning gentlemen.

Good morning.

Good morning Michael.

Steve, I think in your prepared remarks you talked about how you felt with the first half of 2019 from a book of business and backlog positioning standpoint, as you are trying to execute, looking at 2020 and not to get into 2020 expectations, but relative to where you were six months ago to where you finished a second quarter and taking into consideration KeyW, how better or how much more confident relative to your plan or backlog or order roll-off you anticipate in each of the business for 2020?

Yes, we feel very confident about our three-year ramp associated with our strategic plan that we outlined at Investor Day and we are off to a great start in the first half. When you look at some of the macros going on, we continue to feel like we are extremely well-positioned. There is a lot going on as far as budgets being set by the federal government, as well as state local. NASA remains very aggressive in getting to the moon by 2024. The good news is, there is a debate on the amount to be spent at NASA moving into 2020 and beyond. All the talk is more whether it's $1 billion to $2 billion more or something even higher than that. So, we feel good about NASA and our position there. When we look at the Department of Defense budget, the talk is somewhere between $730 billion and $750 billion. When you peel the onion and look at the specific programs, really almost right on top of all the mission-critical programs we participate in, a lot of the programs are actually being discussed as double-digit growth opportunities moving into 2020. So whether it's cyber or some of the other mission-critical intelligence community areas that we and KeyW participate in, we feel very, very confident there. And of course, on our BIAF program, the recent news around the Democrats and Trump talking about federal infrastructure spending has a lot of potential. Whether it's $1 trillion or $2 trillion, we are talking about a lot more spending opportunity in the U.S. around infrastructure. And when you look overseas, the infrastructure opportunities are also robust. The Middle East continues to be strong for us. Even in the UK, with what is going on with Brexit, the spending has been preserved. Many of the major rail and highway programs that we are participating in are moving forward. We believe that once Brexit is resolved, the first focus will be on infrastructure as a stimulus. So, our second largest market in our BIAF sector bodes very well. We continue to be very excited about our advanced facilities business. I mentioned a couple of wins in life sciences and electronics, but we are well placed with our clients in both sectors. Overall, I would say we just continue to be very confident in our three-year strategic plan.

Well will quit Steve, and just Kevin a brief follow-up. When you talk about once KeyW’s in the mix, and you look at the ATN operating profit, and you mentioned about minority chipping at some of your joint ventures majority to minority. How much of a percentage or contribution on a normalized basis would those be to the overall operating profit going forward to ATN?

I don't have that. It really kind of depends on what the win profile looks like. But obviously, if we go from the prime to a sub on the JV or something like that, managing partner versus not, you are going to effectively see- all you are going to see in our financials is the fee that we are earning related to that. It will be a big number in terms of profitability with no revenue. The numbers probably are not exactly hugely material in terms of numbers, but it will be accretive, and certainly we can get that information back to you after the fact when we start to get a better sense of how it's going to play out.

Hi, good morning everyone.

Good morning.

So I just want to dig into the ATN procurement cycle. So I just want to understand from where we are today - continue growing backlog through the balance of the year. And then a little bit longer term relative to the $30 billion pipeline. Can you just talk about the balance of small projects driving potential ones versus larger ones that you mentioned that Hanford was one potential, but is there anything beyond that?

Again, it's such a broad-based answer, so I will try to be succinct around it. But I will just start with NASA. A lot of the ability to grow in NASA starts with performance. We have had great outcomes recently on our award scores. When we look at NASA being aggressive on going after their programs, we see an increasing budget. We clearly see ramp-up at NASA, across the board there. I mentioned automotive where we have unique capabilities in a very high-value wind tunnel, commercial automotive business. We have been very strong in the U.S., and we are expanding into Europe with many of the automotive players. Missile defense, that program is going great for us, and we are finding opportunities to grow. We see that continuing to ramp up. And then when we look at cybersecurity that is an area now where this whole IT-OT convergence is happening. The clients are clearly locking in now to see Jacobs as a major player there and the KeyW acquisition only further increased our brand and awareness alongside of that. We are excited again with KeyW Jacobs around analytics capabilities, artificial intelligence, machine learning, and what we are going to be able to do. I mentioned that some of the specific focal areas by the Department of Defense are in these high-margin differentiated areas where we bring unique capability. So overall, we feel confident in our ability to not only win more than our fair share but also focus on the best value sectors in our ATN industry.

There is another comment to make relative to the strategies that the ATN team has developed and it's about contracting strategies, they are looking to leverage their strong cost profile. There’s a lot of opportunities on the smaller, more fixed-price services which carry good margins and minimal risk, so we see that as a growing part of the strategy.

Great. That is helpful. And just a question here. How should we think about the cash conversion for the business structure for the balance of the year?

Well we think that clearly we saw an improvement in Q2, that was important to do, given what we saw in Q1. Q3 and Q4 tend to be strong cash flow periods for us. So I would think that we should be seeing an improvement in cash flow. Ultimately, it will be driven by our ability to deliver against the DSO expectations that we have for ourselves. We’ve got to continue to drive that down over the second half of the year. I make these comments, X I would say some of the restructuring one-time costs that we are continuing to execute through given the issues associated with our myriad of transition opportunities and transformation opportunities on ECR and CH2M, as well as what will begin to happen which is KeyW. So we feel pretty good about the second half's cash flow and like I said, not sure we will get to the one-times conversion for the full year this year. But we certainly believe that that is going to be the expectation for this portfolio and we should expect that going forward longer-term as we communicated at our Investor Day.

Yes. Good morning. I guess, I just wanted to maybe get one more clarification on the big ATN contracts that you have. You have got the two recompetes that are outstanding and then you have got the Hanford tender that you submitted. So is the timing for the award decision on all of those the same September of this year? In terms of relative scope, how big are the recompete versus the incremental opportunity at Hanford, just so we can think about how those go?

Yes. The Hanford one is both of them should play out around the same time, later this fiscal year. The confidential contract is moving into a 2020 timeframe. We are excited about the majority of our pipeline being new business and not just extensions or rebids. We have moved a lot over the last 12 to 18 months into new areas; the KeyW acquisition is going to accelerate that.

No look, I think if we track both of these metrics obviously and then net against that the billings in excess which is pre-payments our the customers have made, which is how we track our DSO figures. So we did see some of those challenges let's call it at the beginning of the quarter, but not so at the end of the quarter because of the government getting back on track as it relates to the shutdown. Look I think there is a lot of moving pieces in terms of our system environment and implementations, which will create some volatility in those numbers in the short-term. Remember we have gone to, on the CH2M integration, we effectively went to 80% of the CH2M business on to Jacobs’ system environment. We are still working through necessary adjustments and improvements as it relates to that go-live in anticipation for the next 20%, which is probably at the end of our third quarter. There are some kind of moving pieces right now and we are expecting that at the end of the day, all of this will turn into lower DSOs going forward.

Thanks. I will pass it on.

Thank you. So as I reflect on our second quarter results, we are immensely proud of our organizations. We are performing at a high level during a period of extraordinary transformation, where we are focusing and progressing the integration of CH2M successfully. We are executing on our three-year strategy which we laid out on that Investor Day. We made an important acquisition with KeyW in the government services sector and obviously, completing the transformational divestiture of the ECR and separating that from Jacobs. Concurrent with all these activities, people are focused delivering exceptional results. The bottom line is we have extraordinary people delivering extraordinary outcomes. I hope you are as excited as I am about our growth here at Jacobs. Thank you.