Jacobs Solutions - Earnings Call - Q1 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and Welcome to the Jacobs fiscal first quarter 2020 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please allow yourself one question and one follow-up. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jonathan Doros. Thank you. Please go ahead.

Jonathan Doros (SVP of Business Unit CFO and People and Places Solutions Business)

Good morning and afternoon to all. Our earnings announcement was filed this morning. We have posted a copy of this slide presentation to our website, which will be referenced in our prepared remarks. I would like to refer you to our forward-looking statement disclaimer, which is summarized on slide three. Certain statements contained in this presentation constitute forward-looking statements. As such, the term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and 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 facts 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 statement, see our annual report on Form 10-K for the year ended September 27, 2019, and our quarterly report on Form 10-Q for the quarter ended December 27, 2019, which was 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 required by applicable law. During the presentation, we'll be referring to certain non-GAAP financial measures. Please refer to slide two of the presentation for more information on these figures. In addition, during the presentation, we'll discuss comparisons of current results to prior periods on a pro forma basis. See slide two for more information on the calculation of these pro forma metrics. 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 trends of our business when comparing current performance against prior periods. Turning to the agenda.

Speaking on today's call will be Jacobs Chair and CEO Steve Demetriou, President and Chief Operating Officer Bob Pragada, and President and Chief Financial Officer Kevin Berryman. Steve will begin by providing a recap of our financial results and discuss key elements of our strategy. Bob will then review our performance by line of business, and Kevin will provide some in-depth discussion of our financial metrics, followed by an update on our acquisitions and ECR divestiture, 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'll open the call up for your questions. With that, I'll now pass it over to Steve Demetriou, Chair and CEO.

Steve Demetriou (Chair and CEO)

Thanks, John. Turning to slide four, thank you for joining us today to discuss our first quarter 2020 financial results and the progress we're making executing against our strategy. I continue to reinforce to our key stakeholders that we're on a journey to create a company like no other. Since 2015, we have been transforming our business to a technology-focused solutions company that leverages our global scale, deep technical expertise, and now an enhanced brand. At the same time, we've revolutionized our company culture to align our people around one purpose, which is to challenge the accepted and reinvent our thinking to deliver innovative solutions to our customers. The growth opportunities within our core markets are more attractive today than any time in the company's history. We're benefiting from multiple, multi-decade growth trends in the areas of water infrastructure, environmental resiliency, urbanization, space exploration, national security, and 5G.

These are all sectors where we have a distinct competitive advantage. Furthermore, I believe the changes we have made to our culture in the areas of diversity of thought and creating an inclusive environment are in the early phases of being a competitive advantage for Jacobs. From a financial standpoint, we posted a strong start to fiscal 2020. Our backlog grew 6% year-over-year on a pro forma basis. First quarter Adjusted EBITDA, pro forma for the KeyW acquisition, was up 25%, and Adjusted EPS, when excluding the impact of a $0.06 per share discrete tax charge, grew 35%. First quarter Free Cash Flow is in line with our expectations, and we expect strong Free Cash Flow generation for the remainder of fiscal 2020 and beyond as we approach the end of our restructuring efforts related to the strategic actions to transform our business.

Discipline around optimizing working capital is a significant focus of our team. From a flexibility standpoint, we maintain a healthy balance sheet that provides the optionality on how we further deploy capital toward high-return investments. We're announcing today an increase to our share repurchase authorization by an additional $1 billion, which is incremental to the remaining $400 million under a prior buyback authorization. Moving to slide five. As we continue to transform our business, sustainability is a key ingredient in our ambition to become a company like no other.

And it aligns squarely with our value of "We do things right, PlanBeyond," our Jacobs Sustainability Strategy that is aligned to the United Nations Sustainable Development Goals, which was launched a year ago and provides us a great platform to explore the possibilities of reinventing tomorrow, whether it's through how we operate and how we serve our clients or at home with our families or in the communities where we live and serve. Over the last 12 months, we've demonstrated significant progress on that strategy. I want to highlight a couple of actions here. We signed the UN's Global Compact, which commits us to a principle-based approach to doing business in the areas of human rights, labor, environment, and anti-corruption, all things that are already part of Jacobs' DNA and value system.

We also published our first integrated annual report reflecting the integral nature of our financials and our sustainability focus and our commitment to robustness and transparency of non-financial data. We're developing a Jacobs Climate Action Plan, which includes a commitment to achieving a net zero carbon with a focus on reducing the emissions associated with our business travel and from the facilities we own or operate. As part of our walking the talk, is increasing our engagement and thought leadership, ranging from hosting of global sustainability calls with other leaders from government and industry to participating in this year's World Economic Forum's annual meeting at Davos, where I became co-chair of the Infrastructure and Urban Development Committee, focusing on how the adoption of technology and digital investment in the infrastructure sector can improve productivity and help achieve net zero carbon emissions to tackle the global climate emergency.

And our teams are providing sustainable solutions for our clients around the globe with projects like SuedLink, wind and solar power transmission system in Germany, various high-speed rail projects that help decarbonize transport systems. And on the waterfront, in places like Miami Beach, we are leading the Rising Above Climate Change Resiliency Program to combat the impact of catastrophic flooding on infrastructure and business. We're also leveraging our proprietary technology, like our Flood Cloud Service, for on-demand scenario modeling across all infrastructure types. Climate change is one of the most significant challenges our world is experiencing, and we at Jacobs are making a commitment to work toward solutions through our everyday actions as individuals as well as with our clients and communities. Now I'll turn the call over to our President and Chief Operating Officer, Bob Pragada, to discuss the performance of our two lines of business.

Bob Pragada (President and COO)

Thank you, Steve. And now moving on to slide six to review our critical mission solutions performance. Our critical mission solutions pro forma backlog was up 4% from last year to $8.5 billion. And when accounting for the burn-off of the Hanford Central Plateau Remediation Contract, our CMS backlog increased by high single digits over prior years. The Department of Energy has not yet announced the winner of the Hanford Tank Closure Contract, which is a 10-year, $13 billion opportunity. We had a strong first quarter of wins with our international portfolio, where we were awarded several notable contracts in support of our nuclear, defense, and commercial clients. We expect the momentum we are seeing in the U.K. will carry over to our Wood Group nuclear acquisition that is expected to close before the end of Q2.

Moving to our U.S. government sectors, we are aligned to high-priority areas such as mission IT and modernization, space exploration and intelligence, cybersecurity and nuclear remediation, and the spending outlook within our targeted U.S. Federal DoD and related budget is growing in these areas. And on the domestic front, in addition to a solid first quarter, we've had a strong start to the second quarter with two large wins in the Department of Defense. One of these was an eight-year, $225 million research and development contract for the Air Force, and the other is an eight-year, $420 million win, which will be formally announced in the next coming weeks.

From a strategic standpoint, we believe our unique delivery model, which combines strong technical expertise, localized delivery, and an efficient cost structure, affords us the ability to take share within targeted sectors while improving profitability to reach the targets we shared at last year's investor day. As an example of our highly technical capabilities, we're awarded a mission-critical win at the Navy's Conventional Prompt Strike test facility to design and develop next-generation testing equipment for air launch and underwater testing of hypersonic weapon systems. This type of strong technical expertise, combined with our track record executing large enterprise contracts, such as those for the Missile Defense Agency and NASA, presents us with the opportunity to capture incremental large multi-year awards that are slated for decision over the next 18 months.

Moving on to KeyW, space intelligence opportunity, we were recently awarded a new multi-million dollar satellite payload risk reduction and technical maturation program. Due to the highly classified nature of the work, we cannot provide details on specific awards and timing of full rate production. We remain extremely positive on the pipeline of opportunities for multiple customers and expect this to translate into meaningful revenue over the next 12 months. In summary, we're pleased with critical mission solutions performance, and as we look forward, our total pipeline is robust and now stands at a record high, representing a significant year-on-year increase. Now moving on to slide seven, our People and Places Solutions business continues to execute on our strategic plan and posted strong first quarter results with backlog growing 8% year-over-year to $14.2 billion.

Our People and Places Solutions business benefits from its alignment to a diversified set of industry sectors that are all seeing structural growth, such as water infrastructure, resiliency, and autonomous and AI-driven mobility solutions. We are also seeing strong demand in advanced facilities that are creating the next generation of semiconductors, biotechnology, and cloud computing software. We continue to execute against our market, digital, and global connectivity strategy, which allows us to capture higher value opportunities by leveraging our deep domain expertise with our global integrated delivery centers, serving as a focal point for excellence and innovation at a global scale. As the digital economy matures, clients across our targeted sectors are seeking companies that can help them transform their business, automate operations, and enhance operational capacity.

Digital capabilities are becoming ingrained in our delivery model, allowing us to leverage those capabilities with domain expertise to sustain our position as an industry leader. For example, Jacobs has partnered with a key client in the Middle East to develop their smart port expansion master plan, envisioned to expand the port and enhance conventional operations by migrating to automated operations through artificial intelligence and autonomous mobility. Another key part of our digital connectivity strategy is planning for where the market will be a decade from now, whereby advances in neural network technology or machine intelligence will likely unlock exponential opportunities for us to productize our domain knowledge through software applications. Longer term, we envision a higher percentage of our revenue from technology-enabled solutions, which commands higher recurring profitability. Today, we are incubating the first generation of these AI infrastructure solutions.

Last quarter, we discussed a cloud-based AI algorithm to autoscore water infrastructure. Within our innovation incubator, we launched Pavy, which is a software-as-a-service-based asset management solution that optimizes airfield maintenance, unlocking significant CapEx savings and embedded carbon savings. I'm also excited to talk about a project that combines our expertise in PFAS and digital solutions. We have recently been awarded a project by an agency in the U.K. to develop a digital risk screening tool to prioritize PFAS investigation of sources across England. These types of solutions can be applied across multiple infrastructure assets and are enhanced by our domain knowledge accumulated from decades of technical expertise. In summary, we're excited about the near-term and long-term opportunities within our People and Places business, which has a robust sales pipeline up more than 30% year-over-year.

Now I'll turn the call over to Kevin to discuss our financial results in more detail.

Kevin Berryman (President and CFO)

Thank you, Bob, and good morning, good afternoon, everyone. I'm going to switch to slide eight, where I'll discuss a more detailed summary of our financial performance for the first quarter of fiscal 2020. First quarter gross revenue increased 9% year-over-year, with performance net revenue, including KeyW, up 5%, with 7% growth coming from People and Places and 3% growth from critical missions. Adjusted gross margin in the quarter as a percentage of net revenue was 24%, up 50 basis points year-over-year, primarily due to lower benefit-related costs. Lower benefit-related costs also reduced unallocated corporate expenses, which I will discuss later.

Our adjusted G&A as a percentage of net revenue fell by 70 basis points year-over-year and 90 basis points on a pro forma basis, including KeyW, to 15.3%, again indicating continued strong cost control and the realization of cost synergies from CH2M and KeyW. GAAP operating profit was up 34% to $151 million and included $51 million of restructuring transaction and other charges and $35 million of other charges, consisting of $22 million of amortization from acquired intangibles and $13 million of costs associated with the Worley Transition Services Agreements, of which $12 million of those costs were reimbursed and reported in other income. Adjusting for these items, adjusted operating profit was $237 million, up 28% from the prior year. Moving on, our adjusted operating profit to net revenue was 8.9%, up 120 basis points year-over-year reported, with margin expansion from both lines of business.

I'll discuss the underlying drivers by line of business later in my remarks. Q1 Adjusted EBITDA was $260 million, reaching nearly 10% of net revenue, up 150 basis points year-over-year. GAAP net earnings and EPS from continuing operations were up substantially to $179 million and $1.33 per share and included $0.30 per share of after-tax restructuring transaction and other charges, as noted above, and a net positive $0.43 per share of other adjustments, consisting mainly of favorable mark-to-market adjustments associated with our Worley equity stake and other ECR-related matters of $0.56, partially offset by intangible amortization of $0.12. Excluding these items, first quarter adjusted EPS was $1.20, including a $0.06 expense from discrete tax items. Excluding discrete tax items in both the current and year-ago quarter, underlying adjusted EPS was up 35% year-over-year.

Finally, turning to our bookings during the quarter, we are pleased that our pro forma book-to-bill ratio was above one times for Q1, despite the Hanford Plateau contract coming to end of life. We expect a strong bookings trajectory for the remainder of the year. Regarding our LOV performance, let's turn to slide nine. And starting with critical missions, pro forma revenue, including KeyW, grew 3% year-over-year during the first quarter. The quarter was impacted by lower procurement revenue, which also supported incremental margin improvement. Operating profit was $90 million and grew 25% year-over-year and in the mid-teens on a pro forma basis. Operating profit margin was up 60 basis points year-over-year to 7.6%, supported by some project closeout pickups on a nuclear remediation project and improved margin associated with the lower headwinds from procurement-related revenue noted earlier.

In the second half of fiscal 2020, we expect operating profit margins to benefit on a year-over-year basis from our shift to higher margin, fixed-price services contracts, and a higher contribution from the recently acquired KeyW. Perhaps I can make a few comments regarding KeyW. The strategic logic for the acquisition and associated revenue synergies are continuing to indicate an accelerating growth profile later in 2020 and longer term. As we previously announced in October, we won the $40 million a year DC3 Cyber Contract. In addition, the KeyW mission IT business won a strategic $55 million contract renewal, a year contract renewal, and as Bob mentioned earlier, the Rapid Solutions team won a multi-million dollar satellite payload contract. As such, we expect a ramp in revenue and EBITDA growth for the remainder of fiscal 2020.

Moving to People and Places Solutions, Q1 net revenue grew 7% year-over-year and operating profit was up 12%. As a percentage of net revenue, operating profit was 12.1% for the quarter, up 50 basis points from a year ago. The business is benefiting from its alignment to multiple secular growth trends, global scale, and a track record of strong project execution in lower risk verticals. Our non-allocated corporate overhead costs were $32 million for the quarter, down 30% year-over-year, supported by lower benefits-related costs, which I previously mentioned were a factor in our gross margin expansion. We remain focused on cost discipline, but as we have previously stated, we will proactively evaluate incremental investments that will support our digital and innovation journey.

As a result, for the remainder of the year, we expect non-allocated corporate costs to be near the high end of the previous $25 million-$35 million per quarter guideposts. Finally, we started the year strong in adjusted EBITDA performance, reaching a level of $260 million for the quarter, up 31% year-over-year, reaching nearly 10% of revenue for the quarter, up 150 basis points versus a year ago. Now turning to slide 10, I would like to update our initiatives relative to our recent M&A and divestiture actions. Before discussing our most recent efforts, we are pleased that integration of the highly successful CH2M acquisition is largely complete, although some miscellaneous ongoing charges remain for the balance of the year. Cost synergies exceeded our expectations, and revenue synergies continue to deliver higher growth and are serving as a catalyst for our business transformation.

Regarding the sale of ECR, to date, we have incurred $206 million of the approximate $230 million in related transaction, separation, and restructuring costs. We expect the majority of the remaining costs to be incurred by the end of the first half of our fiscal 2020. Regarding KeyW, as of the end of Q1, we effectively achieved the run rate of $15 million in cost synergies, which resulted in our spending $22 of our estimated $25 million of costs to achieve. To date, we have incurred $13 million of transaction fees and other one-time acquisition-related costs. Finally, our acquisition of Wood's Nuclear Business remains on track to close in our fiscal Q2. We continue to expect $12 million in annual cost synergies and expect approximately $30 million of transaction costs and costs to achieve synergies. Now on to cash flow generation and the balance sheet on slide 11.

During the quarter, free cash flow remained impacted by restructuring-related activities. Reported cash flow was -$159 million, but improved $86 million versus the year-ago quarter. One should note that our cash flow is normally lighter in Q1 due to seasonality, and it continued to be impacted by approximately $50 million of restructuring and separation-related cash outflows, offset partially by insurance proceeds related to the newly filed settlement and an ECR working capital adjustment. DSOs did increase from Q4 2019, or up slightly year-over-year. We expect to significantly improve collections over the course of 2020 and still see ample opportunities to lower our DSO run rate over the next two years.

As a result, for the full year 2020, we expect free cash flow to be $450 million plus, including the impact from cash outflows related to restructuring and separation costs, which we believe will approximate $150 million. Our cash flow will strengthen considerably over the balance of the year. We ended the quarter with cash of approximately $600 million and a gross debt level of $1.6 billion, resulting in $1 billion of net debt before attributing the benefit of the Worley equity. Treating the Worley equity as cash, our pro forma net debt to adjusted EBITDA was well less than one times. Regarding capital deployment, we announced today that we have increased our share repurchase authorization by $1 billion to a total of $1.4 billion, which represents approximately 10% of our market capitalization.

We continue to believe that our shares are trading at a discount to their intrinsic value, and we expect to fully utilize our remaining share buyback authorization over time. For modeling purposes, we would expect an average share count of approximately $134 million for fiscal year 2020, excluding additional share buybacks. We will continue to be opportunistic in our share buyback activity going forward and will provide an update on our quarterly earnings call relative to share count expectations in the future. Including the discrete charge in Q1, we now expect an effective tax rate of 25% for fiscal 2020, although we continue to believe our normalized tax rate is approximately 24%. Given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was previously declared at $0.19 per share.

As you know, our current dividend level represents an increase of 12% versus a year ago. Now I'll turn it back over to Steve for some closing thoughts on slide 12.

Steve Demetriou (Chair and CEO)

Thank you, Kevin. I'm excited about the continued traction of our business transformation. We're seeing a strong, inclusive culture developing across Jacobs. Our pipeline is increasing year-over-year with larger, higher margin opportunities, and we're strategically leveraging our balance sheet, investing in ourselves through timely share backs, as well as disciplined and targeted M&A activities and strong growth sectors. We're maintaining our fiscal 2020 Adjusted EBITDA outlook in the range of $1.05 billion-$1.15 billion, which includes the net impact from other income and non-controlling interest.

We are also maintaining our fiscal 2020 adjusted EPS guidance to a range of $5.30-$5.80 per share, which at the midpoint represents 17% year-over-year growth when excluding the impact from fiscal 2019 discrete tax items. In addition, our guidance also factors in approximately a six-month benefit from the Wood's acquisition, which we expect to close by the end of March. As Kevin outlined, as the majority of our restructuring charges are coming to an end, and we are highly focused and confident on delivering strong free cash flow for the remaining three quarters of this fiscal year. In summary, we're continuing our discipline, intensity, and focus around delivering on our profitable growth strategy and look forward to 2020 and beyond. Operator will now open the call for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone.

To withdraw your question, press the pound or hash key. Please allow one question and one follow-up only. Please stand by while we compile a Q&A roster, and our first question comes from the line of Joseph DeNardi from Stifel. Your line is open.

Joseph DeNardi (Managing Director)

Hey, good morning. Good afternoon. Bob, you talked about the KeyW contract success you've had later. I'm wondering if you could just step back. I think prior to the acquisition, they had talked about around 14 opportunities greater than $100 million in value that they had expected to be awarded sometime in 2019. Can you just level set us on how many of those have been awarded? How many have maybe slipped? How many have you won? How many have you lost? Thank you.

Bob Pragada (President and COO)

Yeah, Joe, thanks for the question. So really, net net, we've seen an increase in the number of opportunities.

So that 14 number that was disclosed last year has actually grown to north of 20. And then the ins and outs, I'll just put it this way, we're winning more than we're not, but we're also kind of in an area where we have to consider time as well. The duration of these procurements can be pretty long.

Joseph DeNardi (Managing Director)

Okay. That's helpful. And then you talked about the sensor opportunity. I appreciate you can't talk about certain aspects of it, but just high level, can you talk about whether at this point the risk is more technical or budget in nature? You feel pretty good that this capability is going to work and perform the mission. It just needs to be funded, or is there still a fair degree of technical risk ahead of you? Thank you.

Steve Demetriou (Chair and CEO)

All these this week, Joseph, that the Rapid Solutions side of the business is playing out as we expected. There are multiple opportunities. Bob reported today that we had a major win, and one of them around space intelligence. And these things go through different phase gates for the government, and they're just proceeding on making sure they qualify the winners. And obviously, we've got a major qualification hurdle behind us, and we're on track for what the model was with regard to entering this space intelligence ISR business with the KeyW acquisition.

Joseph DeNardi (Managing Director)

Thank you.

Operator (participant)

Our next question comes from the line of Josh Sullivan from the Benchmark Company. Your line is open.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Good morning.

Steve Demetriou (Chair and CEO)

Good morning. Josh,

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Can you just give us some color on the backlog here? If you think about margins, they've had some higher value content start to come through.

But if you think about margin growth going forward, is it going to be more driven by the type of work that's been won and is in backlog, or do you see margin growth more from some of these restructuring activities, some operational improvements internally?

Steve Demetriou (Chair and CEO)

Yeah, I think it's a combination of both. Clearly, you're seeing us become a more and more efficient company. Our G&A as a % of revenue is clearly contributing to an improved operating profit margin, and we're seeing it across both businesses. But it's also just the transformation of our portfolio and within the two lines of businesses, the work that we're winning. The pipeline is richer in margin.

If you look at the critical mission solutions business, it's not only the intelligent asset management and the continued journey of those government projects, but more IDIQs, the whole strategy to increase the mix of IDIQ contracts is going to be a margin enhancement. KeyW acquisition is a margin enhancement. When we look at the Wood's acquisition compared to our base nuclear business, it's a margin enhancement. So there's an accretion in critical mission solutions. And then you have the same story on the people and places business with regard to the type of projects and programs that we're pursuing and winning in our backlog, but more importantly, in the record pipeline that Bob talked about.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Great. Thanks. And then just the expectation for DSOs to improve pretty substantially throughout the year. Can you talk about what's driving that, what actions you guys are taking?

Kevin Berryman (President and CFO)

Could you repeat the question, Josh? Thanks.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Sorry. Just the expectation for DSOs to improve pretty substantially throughout the year. Can you talk about what's driving that or how that dynamic is going to work out throughout the remainder of the year?

Kevin Berryman (President and CFO)

Yeah, a couple of comments. First one is Q1 tends to be a more challenged quarter on the metric regardless, but notwithstanding that, we're still not satisfied that we're at the levels that we need to be. And similar to last year when we initiated a pretty strong level of actions that were being taken relative to improve our collections over the course of the last three quarters of the year, we're doing exactly the same thing. And so we're focused with our project teams relative to executing against that.

We feel comfortable that those teams have clarity in sight going forward as it relates to how to deliver some incremental improvements, and it will be important for us to deliver the cash flow dynamics that we've outlined for the full year. So we're confident that the team is on top of it. We have the task force team in place relative to focusing on those specific areas that we know that we can make some real positive and strong progress on. And so our expectation is we'll start to see that over the course of the next few quarters.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from the line of Jamie Cook from Credit Suisse. Your line is open.

Jamie Cook (Managing Director of Equity Research)

Hi, good morning. Kevin, I guess just one follow-up on the cash flow question.

I think before the annual state last year, you said a big DSO opportunity I think was on the CH2M HILL side. So I'm just wondering, is it acquisition or the legacy Jacobs? And then how do we think about the cadence of Free Cash Flow for the year? Should we assume it's more back-end loaded versus should we start to see the improvement in the March quarter? And are there any sort of one-time items embedded in that north of 450 to get us to the free cash flow number? And then my second question, obviously, you guys announced this morning that you increased your authorization on your share repurchase, which I think the market liked. Is that a message sort of signaling with KeyW and with Wood that maybe M&A is on the back burner right now?

We focus more on sort of integrating those acquisitions and buying back stock. Thanks.

Kevin Berryman (President and CFO)

So several questions in that, Jamie. Let me make sure I try and cover them all. First one on the pace of cash flow. We do believe that we'll start to see some benefits in Q2 and into Q3 and Q4. So I think that the expectation is consistent with many other years that we have. The expectation is we should start to see some improvements. So I wouldn't necessarily call it back half oriented. I think clearly on the $450 million, we've identified that there is specific restructuring-related items approaching $150 million. That's included in that $450 million number. So if you were to exclude that, we'd be more along the lines of a $600 million number. So I think that addresses your question on the one-offs.

Other than that, clearly, we're going to have to fund the Wood's acquisition coming up here in the next couple of months. So that's a one-off, not in free cash flow, obviously, but certainly it's one of the uses of cash that we're going to have this year. And the last one about the authorization and the current number of 1.4, what are the implications on potential acquisitions? Look, I think our pipeline of acquisitions continues to be relatively robust. I wouldn't say that we're out of that market by any stretch of the imagination, but by the incremental authorization of 1.4, it's clear that we view that we have an opportunity to add value by executing against the incremental authorization.

So I wouldn't preclude other potential transactions, but I think we're being thoughtful and disciplined in terms of our execution against the share buyback, and we will be opportunistic on that basis to ensure that we're adding shareholder value.

Jamie Cook (Managing Director of Equity Research)

Thank you. I appreciate the caller.

Operator (participant)

Our next question comes from the line of Andrew Kaplowitz from Citi. Your line is open.

Andrew Kaplowitz (Managing Director)

Good morning, guys.

Steve Demetriou (Chair and CEO)

Good morning. Good morning.

Andrew Kaplowitz (Managing Director)

You had a nice uptick in CMS margin the quarter. You said it might have been mostly lower procurement, but is KeyW beginning to have more of an impact on margin, or are these margins in CMS now sustainable? And then is KeyW still supposed to be about $75 million in EBITDA for the year?

Kevin Berryman (President and CFO)

First thing on the margin profile, look, I think the numbers that we have and our expectation is that we will be able to see year-over-year margin improvement on the CMS business. That is ultimately the expectations that we've set for ourselves in the balance of the year for CMS. The team is working hard. Steve alluded to a lot of the things that are already happening relative to going after different contract types, which afford us an ability to have some incremental margin. We do believe that there is an ability to continue to show some improvements in that margin versus the year-ago figures. Yes on that. I would say on the KeyW, I think the 75, we never really talked about a $75 million number per se. We did talk about the ability of us to ramp up over the course of 2020.

I won't make a specific comment on what the number is, but I can tell you that with the developing pipeline and the new wins that are coming to the forefront specifically on some of the opportunities that we were really excited about for KeyW. I think we're going to see some momentum in the back half of the year as those things come into the portfolio and we start to burn some of the revenue against that. So perhaps a little bit more back-ended, but we're really excited nonetheless.

Andrew Kaplowitz (Managing Director)

Kevin, can I follow up on the $600 million in cash flow in 2020 in the sense that I think you've said this before, sort of mid-80% conversion on adjusted EPS.

If I go out into 2021, I know it's a long time away, but would you assume that really all of the noise, or should I say the one-time items are behind you for the most part, and you get conversion closer to the 100% average that Jacobs has done over the last many years?

Kevin Berryman (President and CFO)

I think that as we've characterized to all of you, we believe that there is an opportunity for Jacobs to deliver a higher level of conversion on cash flow than certainly we did in 2019, but we all know that that was a lot going on in that particular year.

The $150 million that we've talked about in terms of restructuring and one-time efforts, which are kind of the tail end of the substantive transformation that we've been executing against, certainly are going to be reduced to a significant level by the end of not only this year, but kind of more along the lines of our first half of the year, so look, we're not necessarily done per se if, in fact, we are going to be talking about acquisitions, and we do think there's a strategic opportunity. There will obviously be some one-time costs, but I think we're talking on a more measured level versus what we've seen historically speaking because the transformation of the integration of CH and the exit of the ECR business were fundamentally large transformative issues that we had to work through over the last couple of years all at the same time.

So our view and idea is that as we go forward, it's going to be a little more clear, a little bit more focused, and consequently, the one-off restructuring or opportunities associated with our growth initiatives will be more focused and less robust than what they have been in the past in terms of restructuring-related costs.

Andrew Kaplowitz (Managing Director)

Thanks.

Operator (participant)

Our next question comes from the line of Gautam Khanna from Cowen and Company. Your line is open.

Jeff Molinari (Analyst)

Good morning. This is Jeff Molinari on for Gautam. Thanks for taking my questions.

Kevin Berryman (President and CFO)

Thank you.

Jeff Molinari (Analyst)

So I've got a couple of questions on CMS. How big is the current bid pipeline, and what is the dollar value for bids submitted that are awaiting decision?

Bob Pragada (President and COO)

Yeah, so our dollar pipeline is in excess of $35 billion right now, and about a quarter of those have been submitted.

Probably the better news is that that is up almost fourfold from this time last year.

Jeff Molinari (Analyst)

Okay. Thank you for that. And then what do you anticipate for the book-to-bill to be in the March quarter? Do you think you can continue your streak above one times?

Kevin Berryman (President and CFO)

Look, it's tough to really forecast an exact book-to-bill. Obviously, given the pipeline that's been talked about, our expectation is our book-to-bill improves over the balance of the year with some of these very large opportunities we feel very good about coming to fruition. So we won't quote a specific number, but we certainly expect that it'll be improving versus our Q1 numbers.

Jeff Molinari (Analyst)

Okay. And what % of 2020 sales are up for recompete? Are there any chunky contracts worth calling out?

Bob Pragada (President and COO)

Besides the one we've talked about quite a bit on the Hanford tank closure contract, I think that's probably the one that we're obviously very focused in on.

Kevin Berryman (President and CFO)

Yeah, we have a new bid for the Hanford tank, and we historically had the Central Plateau remediation contract, which is a rebid that's in the process of being protested.

Jeff Molinari (Analyst)

Okay. And then the last question is, I think you mentioned the guidance includes six months of Wood's. Was that the case previously, or I might have missed that?

Kevin Berryman (President and CFO)

Yes.

Jeff Molinari (Analyst)

Thank you.

Kevin Berryman (President and CFO)

Yes.

Jeff Molinari (Analyst)

Okay. Thanks, guys.

Operator (participant)

Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich (Senior Equity Research Analyst)

Yes, hi. Good morning. Just a question on People and Places Solutions. You folks have had really steady, sustained growth, even though the markets have been a bit choppy over the past couple of years.

Can you just talk about where your win rates are today compared to historical levels? Are you having more success on the bids that you're submitting with a wider service offering, or what would you attribute the sustained-up performance here to when you think about it in terms of win rates and project selection?

Bob Pragada (President and COO)

Yeah, it's kind of all of the above, Jerry. So our win rate has dramatically gone up over the course, I'd call it 24 months, and is north of 50% right now. Two ways of looking at it. One is that maybe we're not bidding enough work. That's not the case. But we're bidding in an area from a technical consulting and technical solutions area where our solution is differentiated. And so we attribute that to the win rate.

On your other question with regards to the opportunities, we're actually seeing it's a pretty opportunity-rich environment right now across the globe. And so there's no shortage of activity from a bid as well as a win rate, and I think you're seeing it in the lagging indicators with regards to the financials.

Jerry Revich (Senior Equity Research Analyst)

Okay. And then a question on the balance sheet, Kevin. So unbilled receivables plus contract assets were up $70 million sequentially in the first quarter. They were up $200 million last year. Is that just working through contracts from businesses that were acquired, or can you give us some more context? Because clearly, based on the guidance, you're going to convert that into cash over the balance of a year. I'm wondering if you just build our comfort level on how concentrated that is and what's that related to.

Kevin Berryman (President and CFO)

Yeah, there's a couple larger contracts where it can be a little bit lumpy as it relates to how those things come to fruition. We're confident that given that lumpiness, some of that lumpiness will reverse over the course of the next couple of quarters specifically. So we're feeling pretty good about it, and that's one of the reasons that we're pretty excited about the balance of the year cash flow. And so at the end of the day, we're on it. We're focused, and the team, I'm confident, is going to execute against it.

Jerry Revich (Senior Equity Research Analyst)

And Kevin, what are the milestones, and are the projects on time so far? Any additional color that you can share?

Bob Pragada (President and COO)

Sorry, Jerry. Milestones with regards to those potentially lumpy jobs, is that what you're referring to?

Jerry Revich (Senior Equity Research Analyst)

Yeah.

So in other words, when can we change unbilled receivables and contract assets into billed receivables and eventually collect cash? So what are the milestone dates that we have to complete on those contracts to be able to issue the invoice, if you will?

Bob Pragada (President and COO)

Yep. And so it's right in line with what Kevin said. It's within the next couple of quarters. So that improvement that we're seeing over Q2, Q3, and the balance of the year, those milestones fit right within that timeframe.

Jerry Revich (Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

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

Michael Dudas (Partner)

Good morning, gentlemen.

Steve, in your prepared remarks, you talked quite a bit about climate change, and I think most people have been noticing, at least I have, over the last several months, even weeks, a lot more visibility, a lot more concern, a lot more companies talking about you. Is it more from a government standpoint, or are you having your private client customers engaging you on these solutions? And in PPS, when do you think we'll start to see noticeable wins or announcements that will start to drive where I'm sure this is better margin, but better work through that segment?

Steve Demetriou (Chair and CEO)

Yeah. So just use the World Economic Forum, Davos, just in the last couple of weeks as a barometer. It was clear that it was across all sectors: government sectors, the politicians that are there, the commercial CEOs on a global basis.

It felt like, coming out of this Davos, that there was a huge shift, and this is something that we got to casually look at over the next several years to a crisis that everybody's on top of and committed to, so I think it's transitioned now to be a major issue and opportunity for us at Jacobs. We're developing our own plan to be net zero carbon neutral at some point in the future, and more importantly, we're already winning business, and we're already in the mix of being a solutions player on a global basis. We announced over the last year, year and a half, projects like the Miami Beach sea level rise, what we're doing in London around the Thames River, and you name it.

Any major city, whether it's San Francisco or all the way to Singapore, the type of things we're doing to address climate change is where we're viewed as a solution provider by our clients. Clearly, higher margin opportunities, and it's across the board. We're not only going in with traditional solutions, but we're going in with innovative solutions using artificial intelligence and digital capabilities to address these issues in a much more efficient, innovative way. And as a result, we've got a high win rate as we pursue these opportunities across the globe.

Michael Dudas (Partner)

And I assume that's where a lot of the internal investment, at least that you talked about relative to 2020 and beyond, adding the talent and scope and solutions on that front?

Bob Pragada (President and COO)

Yeah, absolutely, Mike. Clearly, the human capital element is a big piece of that.

If you look at our demographics right now, the age demographic probably stands out as I just said in the last 10 years, that number has dropped by 10 years. And then from a technology standpoint, we're putting some real investment in simulation tools, whether they be simulation tools around floodplains and flood control all the way to water resiliency and even coastal protection. We just were awarded, and I know this has been announced, it's called Project Orange. It's the coastal restoration for the Gulf Coast starting in Galveston and going all the way through the Gulf of Mexico. And the technology that we're utilizing in order to build those solutions is really impressive. So more to follow.

Michael Dudas (Partner)

Thanks, gentlemen.

Operator (participant)

Our next question comes from the line of Michael Feniger from Bank of America. Your line is open.

Michael Feniger (Managing Director of Equity Research)

Hey, guys. Thanks for taking my question.

If I could just circle back on your comments before that, you will still be in the M&A market. I mean, can you flesh that out a little more? You mentioned how your stock and the intrinsic value there. How are you seeing multiples moving in the pipeline when we look at the defense and the people segment over the last few quarters?

Steve Demetriou (Chair and CEO)

Well, from an M&A standpoint, I think Kevin said it exactly right. Our first priority is our own stock. That's why we just announced a $1 billion stock buyback. We still see Jacobs as being one of the best, if not the best, use of our capital over the near term based on what we see our organic runway and the path forward for the company.

We're staying core to our strategic plan that we announced a year ago with regard to things like strengthening our capability and digital consulting or selective geographic expansion, gaining more bolt-on capabilities around innovation and technology, and so the things like KeyW and Wood most recently were more in the form of bolt-on strategic enhancements to our ability to have outsized organic growth, and I think that's what you'll see us continue to be focused on over the near term. We had the luxury of being highly selective because of our ability to redeploy our capital back to Jacobs, and so any acquisition that we make over the next few years, it's going to be benchmarked against the alternative of buying our stock back, so it has to be superior value.

Michael Feniger (Managing Director of Equity Research)

Fair enough.

And when we think of defense in the private market, we've seen a lot of activity there to really drive scale. If we look at the design and consulting side for environment, water, transportation, how important is scale there in the industry? Obviously, CH2M has been a success. I'm just hoping you could talk about scale and how that benefits in that fragmented industry right there.

Bob Pragada (President and COO)

The scale definitely helps, and scale matters, but I would probably characterize it as it's one of a few key criteria. It's not scale by itself. It's scale coupled with technical expertise, coupled with technology-enabled solutions. And so we see all of that really as the driver, not scale for scale purposes.

Steve Demetriou (Chair and CEO)

I want to build on that because I think that's been a key ingredient to our success at Jacobs with our acquisition strategy.

A lot of companies make acquisitions that double their size in an industry, but there's a lot of overlap. And as a result, there's all kinds of cultural disconnects that get created, and we've seen those around the industry for the last decade. CH2M was a perfect example of a complementary acquisition. Yes, it did give us scale, but more importantly, it kind of filled in the holes that we didn't have. So it was water, strengthening our environmental Tier 1 nuclear, and a whole host of other things. And as a result, it was more of a diverse offering that gave our clients more of a one-stop shop at Jacobs that I would just put more in the area of value and diversity rather than scale group.

Michael Feniger (Managing Director of Equity Research)

Thank you.

Operator (participant)

Our next question comes from the line of Sean Eastman from KeyBanc Capital Markets. Your line is open.

Sean Eastman (Senior Equity Research Analyst)

Hi, team. Thanks for taking my questions. Just to continue on the last discussion topic there around scale, of course, a lot of chatter recently around consolidation in the design and engineering space. I'd just be curious to get your sense on, from a competitive perspective, what the emergence of another kind of mega player through a combination would mean competitively for Jacobs. Would there be a potential threat there or, on the flip side, potential opportunities emerging?

Steve Demetriou (Chair and CEO)

Yeah. It really depends, again, on what that combination leads to. If it's a combination that two companies or two entities get together and there's just a lot of overlap, that'll be a positive force. There'll be talent opportunities. There'll be disruption. There'll be culture challenges that impact those kinds of acquisitions.

Consolidation is also a positive from a standpoint that as industries get fewer competition, although stronger, there's positives out of that. So clearly, we're not saying that there's no threats of those types of combinations if they occur. But at the end of the day, our view is that it isn't about scale. It's about value. It's about differentiation. It's about matching that up with a culture of execution and innovation and accountability and all the things that we've been demonstrating over the last four years. And so we'll stay close to what happens out there in the industry, but it really depends on what that looks like.

Sean Eastman (Senior Equity Research Analyst)

Okay. That's helpful. And next one for me is just on this transition at the DOE Hanford side. It's come up a few times on the call today. I'm just curious.

It seems like the tanks contractor selection process has been a little more protracted than expected. And I'm just wondering, given this is the one kind of big recompete this year, how we should be thinking about this plateau versus tanks dynamic and timing relative to what's built into the 2020 guidance.

Steve Demetriou (Chair and CEO)

Yeah. I think there's not a lot of risk for us over the short term in our guidance around Hanford. And for us, it's playing out so far. We'll see what the outcome is as we expect it. As we said in our previous calls, we did pursue both plateau and tanks, but we decided to be a sub or we didn't move into the prime position in plateau and really put all our efforts around teaming up with a great partner and pursuing tanks where we believe we could offer something unique and innovative to the client.

And so as far as how it plays out, there is uncertainty of whether it's a month away or six months away. And I think that they're trying to finalize the plateau initiative. There's a protest going on in that initiative that probably has stalled tanks, whether it's a one-month stall or something that'll be several months, we don't know, but it's going to be immaterial to our 2020 results.

Sean Eastman (Senior Equity Research Analyst)

Okay. Very helpful. Thanks for the time.

Operator (participant)

Our next question comes from the line of Chad Dillard from Deutsche Bank. Your line is open.

Chad Dillard (Director of Equity Research)

Hey, guys.

Steve Demetriou (Chair and CEO)

Hello, Chad.

Chad Dillard (Director of Equity Research)

So you guys talked about going after different contract types in CMS, which would ultimately drive your margins upward. I just wanted to get a little bit more color on that. Can you talk about just what different capabilities you need? Are you potentially seeing new competitors in that new landscape?

And just talk about the progress thus far on achieving that.

Bob Pragada (President and COO)

Sure. Just before answering directly, just a little bit of a backdrop, and it kind of applies to M&A as well, but specifically on the contract type. If you remember back in our investor day, this was a defined element of our strategy. And so the capabilities in order to go up the value chain, coupled with the systems and project delivery know-how on how to deliver fixed-price work, we have. And we've had for years. We were probably not as aggressive on converting what historically was cost-reimbursable type work into fixed-price task orders. And now that initiative is in full force. From a competitive perspective, we're not alone. So the competition is also going down the same path. We're pretty confident that we have an edge in that because of the entirety of our business, even beyond CMS.

And to PPS, it's kind of embedded in our roots on how to deliver great projects. So we're confident that this is something that's going to take hold. And like we said last February, it's going to be about a 12 month- to 24-month period for us to get that as a material part of our portfolio, but we're on the right path.

Chad Dillard (Director of Equity Research)

That's helpful. And just a question on the quarter, just in terms of the core free cash flow of the business, and I'm sorry if I missed it. You mentioned it earlier. Can you just talk about what that was? And then hopefully, you can bridge that to what the actual headline number was. And then secondly, on CMS margins, I think there may have been a closeout, and a possibility of quantifying that would be great. Thanks.

Kevin Berryman (President and CFO)

We won't go into the details, but certainly, taking your second question first, the margin pickup was a chunk of the incremental benefits we had. The idea, though, as it relates to what Bob was talking about in terms of the other margin improvement initiatives, we feel are taking hold and gaining traction as it relates to the balance of the year. So that's perhaps that one. As it relates to the cash flow, cash flow was kind of in the neighborhood in Q1 of -$150 million. And there were a couple of pluses and minuses in that number. So if you look at the headline number, our underlying was probably pretty close to the same number. Clearly, we had restructuring that was part of that, but we also had some benefits as it relates to ECR-related adjustments on working capital, which was a positive.

And then we also had some insurance proceeds that were associated with the Nulife matter. So at the end of the day, pretty close to being the same number. And I think that that translates into us being able to leverage off of what that underlying number is, focused on ability to deliver incremental improvements and collections. And we're feeling pretty good about the balance of the year.

Chad Dillard (Director of Equity Research)

Thank you. That's all for me.

Operator (participant)

Your last question comes from Andrew Wittmann with Baird. Your line is open.

Andrew Wittmann (Senior Research Analyst)

I'm going to yield the floor. All of my questions have been asked and answered. Thank you.

Operator (participant)

Okay. And there are no further questions at this time.

Steve Demetriou (Chair and CEO)

All right. Thank you.

The most exciting part of where we are as a company is the momentum that we've generated by our people's belief and commitment and what we're doing and where we're headed. At the end of the day, we're a people business. To be the employer of choice in a highly competitive marketplace, genuine engagement and buy-in from our people is critical. Our focus on global challenges that are important to us as human beings as well as important to each and every one of our clients is a key part of that engagement and commitment. The return is visible every day through the innovative solutions we're delivering for our clients. Our people really are reinventing tomorrow. Thank you very much.

Operator (participant)

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