Jacobs Solutions Inc. (J) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Michel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs’ Fiscal Second Quarter 2019 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Jonathan Doros. Please go ahead.

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 Tari's leadership, our ATN line of business has developed a deep - of leaders with proven execution capabilities and a roadmap for continued strong profitable growth. And while I will miss Tari's amazing 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, he 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 fit 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 in the ATN leadership team. Turning the Slide 5. Our second quarter results demonstrated continued momentum toward achieving our 2019 outlook. And our first half performance is a great start for 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 to 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 capability 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 multi faceted approach that consists of top down inspirational leadership and clarity of strategy throughout the organization and inclusive and diverse workplace so all employees feel engaged and empowered and we have innovative and entrepreneurial opportunities for our employee development. Let me share two examples of our focus to create a healthy and attractive workplace. First, this week at Jacobs is Safety Week. We use Safety Week to refocus our commitment to be leaders and making health and safety a priority, both physical and mental. Throughout this week across the globe we will raise awareness of key health and safety topic, engaging our workforce, clients, contractors, family and friends by sharing information, ideas, and celebrating success. As evidenced that our diversity initiatives are 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 Cyber security, Applied Geospatial Science, Automated Design, Internet of Things and Predictive Analytics. Our announced acquisition of KeyW directly aligns to 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 PW's mission IT an offensive cyber capability will enable us to offer the full spectrum of IT services. Jacobs’ existing clients already recognized 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 an infrastructure business. We will be able to deploy enhance 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 continue 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 burning 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 years $785 million single award IDI 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 a software solution 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 cyber security 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 highs $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 in an industry leading efficient cost structure will allow us to continue to gain share over time. Now turning the 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 to 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 over reporting several wins, including IDIQ contracts with the Army Corps of Engineers and the U.S. Department of State Bureau of Overseas Buildings Operations. In 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 and 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 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 expense. Our water business remains strong with solid year-on-year growth 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 the 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 takes care. 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 continue 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 this 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 proposal 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 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 someone. 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 in tangibles and $6 million a standard cost 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 periods. Our adjusted operating profits 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 cent benefit from a non-tax deferred tax adjustment related to the ECR sales and at one-time $0.18 benefits primarily associated with a settlement gain associated with the closure of CH3M 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 of 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 are strong and as Steve mentioned, we are beginning to see revenue synergies from CH2M materialize in our backlog. Regarding our [LOB] (Ph) 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, 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 includes 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 Days. 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 TW. 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 runway 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, total over $200 million. Free cash flow substantially improved in the quarter from our Q1 figures as our focus on driving improved cash flow gain traction. Certainly part of that improvement was driven by improved DSO level. 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 form net debt assuming full taxes paid on ECR transaction to the 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 us 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 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.

[Operator Instructions] First question comes from Josh Sullivan from Seaport Global. Your line is open.

Hey Josh.

Hello Josh. You there?

Go ahead Josh.

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 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 longer term, including KeyW. And I think the 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.

Yes.

Your next question comes from Lucy Guo from Cowen and Company. Your line is open.

Good morning. Thank you for taking my question. Want to say congrats to Terry 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 talked about your 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 are 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, we believe the second quarter is going to be a very solid quarter, there has 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 recomplete timing is just two large ones that you have highlighters, 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] (Ph) 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 Jacob. So all-in-all, a great pipeline going forward.

Your next question comes from Michael Dudas from Vertical Research. Your line is open.

Good morning gentlemen.

Good morning.

Good morning Michael.

Steve I think in your prepare remarks you talked about how you felt with the first half of 2019, from a book of business 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 their whole program of getting to the moon by 2014 and the good news is, there is a debate on how much more will be spent in NASA moving into 2020 and beyond, but the good news is, 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. And then when we look at Department of Defense budget, which, I think 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. And 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 then of course on our BIAF program, the recent news around the democrats and Trump talking about finally getting at this Federal infrastructure spending. Whether it's $1 trillion or $2 trillion, we are talking about a heck of a lot more spending opportunity in the U.S. around infrastructure. And then when you look overseas, the infrastructure opportunities are very robust. The Middle East continues to be strong for us. But even in the UK with what is going on with Brexit, the spending has been preserved, a lot of the major programs on rail and highways that we are participating in are moving forward. And we believe that once Brexit is resolved, the very first thing they are going to focus on is infrastructure to be a stimulus to the economy there. So, our second largest market in our BIAF market bodes very well. And then we continue to just be very excited about our advance facilities business. I mentioned a couple of two wins in life sciences and electronics, but we are well placed with regard to the clients that were focused on in both of those sectors and so all-in-all, I would say we just, we 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 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 in fact, 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 earnings as it relates to that. So obviously 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.

Excellent. Thank you gentlemen.

Your next question will come from Jamie Cook from Credit Suisse. Your line is open.

Hi, good morning. Just a couple of clarifications on the guidance. Kevin, I think in your prepared remarks, you mentioned something about revenue growth or the top-line in the back half sort of moderating. Can you just talk about the drivers behind that or just get a little more specific in particular with restating things year-over-year? And then my second question is, obviously, this changes with KeyW, but the operating margins and ATN. How you are thinking about that in the back half as well? Thank you.

Yes. I think, clearly, Jamie. As it relates to the back half moderation comment, it's really more about the fact that the comparables for ATN specifically continue to expand and grow last year in the back half as the ramp up on the large enterprise contracts occurred. So the comparables in the back half of 2018 are strong, stronger than what the first half was. So we are just comparing to a bigger part of those ramp ups that actually haven’t occurred. So that is probably the biggest piece of the ramp down. I think that or the moderation down. I think the other point as it relates to margin profile. As we think about going forward, certainly the ATN business has an expectation level that we are going to be improving margin consistent with the strategic plan that we outlined relative to the Investor Day, and we would expect to see part of that occurring in 2019 back half as well. Relative to KeyW, it depends on really when it closes, and to the extent it does close, with enough time to really have an impact in the back half, we would expect to see accretion relative to that as well. But it will be pretty immaterial given where we are in the year and when the when the close might occur. Some potential limited benefit in fourth quarter, but it really depends on when the deal closes.

Okay. Thank you. I will get back in queue.

Next question will come from Jerry Revich from Goldman Sachs. Your line is open.

Yes. Hi. Good morning, everyone.

Good morning.

Hi Jerry.

I'm wondering if we just flush out in BIAF, really short bookings this quarter, can you give us a sense for how much of the growth was in water versus transportation? So what part of the portfolio are you seeing backlog growing? And, related question the $2 billion plus CH2M, revenue synergy pipeline, how much contribution are you expecting over the next call it 12 to 18 months? How much have we already seen flow through the results? Can you just touch more granularity on that part of the opportunities that plays?

Good, thanks, Jerry. It's been for BIAF pretty much across the board. We, we have seen it both in the B&I side as well as the advanced facility side. When we look at our business, we are ramping up some major water programs that we have announced out in California and Houston and some others that clearly we attribute to the combination of Jacobs in and CH2M. We had a major highway win in the Washington DC area that was something that we don't believe either Company would have won on its own together. And the other story on that Jerry is that it's margin improvement as well. Whereas both companies in the past would have partnered with others including each other and would have had to share the margin. As an integrated Company now, you know, we are getting more of the pie, as we are winning rail or highway or airport or water, environmental solutions wins, because of the fact that we can bring now most everything we need other than having to team up from time-to-time with small, set aside business partners. So, just can't overemphasize, it's across the board. The advanced facilities was a major contributor this quarter and as they are ramping up, programs both in the electronics and the life sciences area. And it's and it's been global across the globe, but really the only soft point that is in the Australia, New Zealand area after several great years there. So, we really like what we are seeing across the globe in all sectors.

Okay. And then coming back to your comment about sales growth moderating in the back half because of the tough consummate in ATN. On the flip side, you have really strong bookings momentum in BIAF and where the organic growth is generally year-to-date been call it towards the midpoint of your long-term targets, and it feels like you have got better bookings momentum, at least near-term. Can you address to what your expectations are for BIAF or organic growth, is that any comps that we need to be aware of?

Look, I think, if we were to characterize the growth outlook for both of the businesses, ATN while we still like the growth. BIAF has the stronger kind of near-term momentum over the back half of the year, because they are not facing some of the ramp ups that ATN had in back half of last year. So year-over-year is certainly going to be stronger for BIAF in the back half than ATN. And I would say that, we feel good about those bookings and how they come into the mix. I think it's very clear, with the backlog being $1.3 billion in BIAF. At the end of the quarter clearly that is indicating some stronger near-term opportunities in terms of the burn in the back half. So certainly stronger in BIAF more muted in ATN, but still we feel pretty good about the back half in terms of the revenue growth but moderating a tab.

Okay. And let me add my congratulations to Teri as well, quite a contribution to the business Teri and Dawn welcome and we are looking forward to working with you. Thanks, everyone.

Thanks Jerry.

Thanks.

The next question will come from Tahira Afzal from KeyBanc. Your line is open.

Hi, folks, congratulations on a good quarter.

Thank you.

Thank you.

I guess first question, and I hate to beat the ATN horse again. Kevin, but I'm looking at your 2% to 3% CAGR guidance and even if I assume a massive fade for the rest of the year, it seems it’s tough to build my CAGR even at the upper end of that as and I'm well exceeding that. Unless I assume that your revenues in ATN are flat or even was pretty out a year. So I assume that is conservatism on your part and to the extent it is and the read actions would be higher, how does that impact or benefit your margins?

So for the ATN guide, we haven’t really given specific guidance first point and as it relates to our revenue for ATN at a good quarter, obviously this quarter. And consequently, I think that the back half is still going to be showing some growth. And perhaps, what you are talking about is the guide previous to this quarter. So I think effectively we will see incremental revenue versus what we had been thinking last quarter. I will say the margin profile was a little bit less strong, given the mix of the profile. And consequently, we saw a little bit lower profitability margin associated with that relative to the dynamic. But I think 2019 is shaping up to be a pretty good pretty good look for ATN in terms of revenue and BIAF. So if you are talking about the longer term guide in the Investor Day, clearly that plays into the whole dynamic relative to joint ventures and how that may or may not play into the profile and there is a big chunk that if we do our strategy, which has been to participate is not the general partner in some of the JV work. That will ultimately affect our reported growth profile and that is one of the reasons for that guidance.

Got it, okay. And Kevin, I recall you guys bought a communications-oriented business a while back, maybe a Verizon piece. Can you leverage that towards a lot of the satellite work or the lower newer work you might be doing once KeyW gets going?

Yes I think the - you are talking about the FNS acquisition, which was four or five years ago, maybe. So, yes. Look I think that certainly was one of the initial stages of the transformation of the ATN organization in terms of getting into that business with certainly being very high technology oriented and work associated with managing telecommunications for some of the three letter agencies in the U.S. Government. So clearly, a high technology play, and we have been very, very excited and happy with that deal. I think ultimately, the KeyW - while I think there is opportunities in ATN to further leverage those capabilities. I would say we are actually excited about the opportunity associated with BIAF as well, because of the [sensoring] (Ph) capabilities to bring some of that technology into play in terms of the portfolio of BIAF longer term. So, yes, I think there is some opportunities in ATN and we think there is good - we talked about there being strong revenue synergies, which were not included in our analysis on the KeyW acquisition, but they don't only exist in ATN, they also exist in BIAF well.

Got it. Thank you Kevin.

Your next question comes from Andy Kaplowitz from Citi. Your line is open.

Good morning. This is [indiscernible] behalf of Andy.

Good morning.

Good morning.

Good morning. Can you give us some color on what is underpinning the continued strength in Middle East infrastructure that we just reference. Given that we have seen some more mix trend in other industrial end-markets in the region?

I think, it's in different areas. We are doing a lot of work in places like Abu Dhabi and Dubai and there is things going on with the Expo, there is major rail expansions, there is economic growth that is driving the need for new infrastructure, you have got Saudi Arabia with the 2030 vision. And just a real relentless pursuit of expanding everything from health care to entertainment to smart cities. And so, I can't compare it to what is going on in other areas, but if I do look at Saudi, for example, it's a diversification and it's now spreading its funding, which in the past has been exclusively around the energy and chemical refining sector to areas around infrastructure is a good example.

Thank you that is helpful. And my follow-up would be with ECR sale complete and given that you noted that CH2M integration is there complete. Can you talk about how you think about the face off potential incremental M&A activity going forward? Should we expect some pause coming into the activities till you close out the KeyW or should we see more bolt-on acquisitions?

Well, I think we still have a tremendous runway of opportunity to maximize the integration and synergies of CH2M especially with our BIAF business. I expect that from time-to-time we will have some bolt-on opportunities to take that combination of BIAF’s Jacobs and CH2M capability and bring some additional capabilities, talked about at Investor Day digital consulting is an area that we are interested in and there could be on a bolt on opportunities. ATN, I think you know, where the KeyW was a an initial step of our strategy to really become a tier one government services player especially focused around areas like federal it and you know the intelligence community and those priority areas for us. And so I would expect over the next several years from time-to-time, some bolt on opportunities. But, we are very mindful and balanced around our capital deployment. We still believe Jacobs is a great investment and, we have launched our first step with the ASR and we laid out the fact that we expect to not only continue our dividend, but increase it as our earnings increase. So, we believe a good disciplined patient capital deployment strategy.

Thank you.

Your next question comes from a line of Steven Fisher with UBS. Your line is open.

Thanks. Good morning. Just a competitive question around ATN. I know you expect to pursue and win higher margin contracts in ATN. I guess to what extent are you guys seeing a convergence of bidders on a relatively narrow batch of higher margin attractive, technologically driven contracts? Or is the overall pie of higher margin contracts just getting bigger? I'm sure. everyone wants to pursue higher margin work. Are there more opportunities for everyone or is there a convergence on sort of a select set?

Well, we have talked about the fact that ATN, unlike most of our other markets is very highly fragmented. And we still have a relatively small share of the whole big pie there when we talked about just in the U.S. market. And So, you know we see our ability because of our differentiated models that we talked about around our ability to tailor our offerings to our clients rather than some of our competitors bringing sort of their overhead structure to the clients and to work in a in a swift basis. And I think KeyW is only going to get us even at a higher level there with their rapid deployment that is been the proven differentiation. And so, we look at it less around how much are we all going after the same thing versus our ability to bring unique offerings? Our wind tunnel business, for example, in ATN, we bring a unique technology there that enables us to come in good solid margins and win more than our fair share of business there. And our ability now to work with our clients around 5G deployment is a very positive area, cyber security and what we have done now with KeyW to strengthen our cyber security platform is only going to make us stronger there. And we are excited again with KeyW Jacobs around analytics capabilities, artificial intelligence, machine learning and what we are going to be able to do. And I mentioned that some of the specific focal areas by the Department of Defense are really in these high margin differentiated areas where we bring unique capability. So all-in-all, we feel confident in our ability to not only win more than our fair share, but to focus on the best value sectors in our ATN industry.

There is another comment to make to relative to the strategies that ATN team has developed, and it's really relative to some of the contracting strategies and they really are looking because of their very strong position on cost profile and in capabilities, which Steve has just outlined. There is an ability for the team to be doing fixed price services work, which is low risk, but ultimately allows for margin enhancement and Teri outlined that as part of Investor Day, and I think that that continues to be an opportunity for the team in ATN to continue to drive that business. And so not only do we have the opportunity on the enterprise contracts, the larger ones, which sometimes can be a little bit more challenging from a margin perspective, there is a very specific focus on the other side, which is some of the smaller, more fixed price services which really don't have risk that is any different than some of the other jobs that we do or projects that we do And consequently that is a screen part of the strategy and already is part of the strategy that is being executed by the ATN team.

Your next question comes from a line of Chad Dillard with Deutsche Bank. Your line is open.

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 here 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. And we have had great outcomes recently on our award scores. And so when we looked at NASA being aggressive on going after their programs and we see an increasing budget, we clearly see ramp up at NASA, across the board there. I mentioned automotive where we have unique capabilities and a very high value wind tunnel, commercial automotive business. We have been very strong in the U.S., we are expanding into Europe, with a lot of the automotive players there as fuel efficiency and acoustics and some of the other areas that the automotive industry was focusing on. 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, as I mentioned earlier cyber security that is an area now that where this whole IT OT convergence really excited to see the clients lock in now to see Jacobs as a major player there and the KeyW acquisition only further increased our brand and awareness there for penetrating that business. So it's pretty widespread and then internationally in the UK, we are in also Europe, we are focused there are some initiatives we are working on to get bigger outside of the U.S. on ATN into some adjacent markets. And then the opportunity is, as I mentioned earlier, this ability to take what we are doing in ATN and BIAF together and looking at opportunities, whether it's smart cities or the 5G rollout or, other opportunities to bring our domain, knowledge and capability that we have established in buildings, infrastructure, advanced facilities, and bring the ATN capabilities to those markets. So, there is a tremendous opportunity that is driving that $30 billion pipeline that we mentioned earlier.

I think it's important to augment or reinforce Steve’s comments that he also made during the prepared remarks, which talks about kind of this is a government services business that we have and everyone talks about DoD and what the total increase is. But if you peel away the onion, and you look at what we do for the DoD and NASA and other agencies. The increases are not the kind of single-digit numbers that everyone is talking about, it's more in line with double-digit increases in 2020 for the Federal Government business. That still got to be worked through, but clearly indications are where we do our work. We are talking more in line with double-digit increases in spend for the government in the 2020 budget. So it obviously, on top of what Steve has talked about in terms of capability sets a foundational element of there being a general boat that is floating a little bit higher in the water.

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, it's ultimately going to be driven by the ability for us to deliver against the DSO expectations that we have for ourselves, we got to continue to drive that down over the second half of the year. And I make these comments, X I would say some of the restructuring one-time cost that we are continuing to execute through given the issues associated with our myriad of transition opportunities, transformation opportunities on ECR, on CH and what will begin to happen which is KeyW. So we feel pretty good about the second half cash flow in the back half and like I said, not sure we will get to the one-times conversion for the 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.

Thanks. I will pass it on.

Your next question comes from the line of Justin Hauke with Robert Baird. Your line is open.

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 and just 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? What it might be?

Yes. The Hanford one is both of them should play out around the same time and it will be later this fiscal year. Whereas the confidential contract is more moving into 2020 timeframe. So, those are not overlapping and what we are excited about is and especially when we look at about the $30 billion pipeline, the majority of that is new business and it's not extensions or rebid, although, they will be from time-to-time. But we are really expanding into when you look at the wins that have moved the needle for ATN over the last 12 to 18 months, whether it was the Special Ops Command or missile defense, as an example. Look, we moved into new areas there the KeyW acquisition is only going to accelerate that now when we talk now about getting into ISR space and being able to take their capabilities and move them into our water business or sustainable solutions or agricultural solutions. When we talked about this whole IT, OT convergence that is moving into new areas. So I think we are well balanced when it comes to contracts extensions or rebids in new business.

Okay, and then I guess my second question here is just on the DSOs. Kevin, I appreciate your comments on that. But the unbilled was up fairly significantly quarter-to-quarter $230 million or so. I know last quarter there was issues with collections on the Federal Government. But is that still tied to that or is that you know - the federal billings have those been billed is $230 million still on that or is it something else?

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 that our 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 at the end of the quarter, because of the ability for the government to get back on track as it relates to the shutdown that we had there for a bid. So, 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 that we have gone to on the CH2M integration we effectively at the beginning of the year went to 80% of the CH2M business. Roughly plus or minus went on to the Jacobs system environment, that we are still working through the adjustments and necessary improvements as it relates to that go live in anticipation for the next 20% going live, which is probably at the end of our third quarter, which is coming up here shortly. And, and so there are some kind of moving pieces right now. We are expecting that at the end of the day, all of this is going to translate into lower DSOs is going forward we have to, because we saw the tweak up in Q1 to the levels that we believe we need to get down quickly.

Thank you.

There are no further questions in queue at this time. I turn the conference back over to our presenters.

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 and the government services sector and obviously, completing the transformational divestiture of the ECR and separating that from Jacobs. And concurrent with all of these activities, people are focused delivering exceptional results. So the bottom line is we have extraordinary people delivering extraordinary outcomes. And I hope you are as excited as I am about our growth here at Jacobs. Thank you.

This concludes today's conference call. You may now disconnect.