Jacobs Solutions Inc. (J) Earnings Call Transcript & Summary

Thank you, everyone. Good afternoon. This is Sheila Kahyaoglu with the Jefferies aerospace and defense equity research team, and we're hosting an IT services summit today, and we're very lucky to have the Jacobs team with us. Kevin Berryman, who's CFO; and Valerie Roberts, who's SVP of Critical Mission Solutions; as well as Jonathan Doros in the background right now. Thank you both for being here.

I wanted to start off with a big-picture question and something we've been getting from investors on how do we think about the defense budgets from here with deficits ballooning given stimulus funding? And how do you guys think Jacobs is positioned?

Yes. Thanks, Sheila for arranging this. Great to be on with you, guys, virtually. I look forward to ultimately, at some point in time in the future, at not being virtual, but it is what it is right now it's right thing to do. So anyway, look, I think it's -- the story line about this, and then I'll turn it over to Valerie to give some more kind of color commentary on it, I think the reality is when you think about the big-picture DoD kind of budget figures, they're important. Ultimately, they set a context. But what is probably most interesting is to peel away the onion, to think about what kind of position we are playing in and what are those areas that ultimately we'll benefit from, from high-priority spend areas. And I would say that Jacobs has repositioned its portfolio over the last several years to be more oriented and better aligned with what we would call the highest level of growth areas within the U.S. government. I could turn it over to Valerie. But before I do that, just one other comment. Even notwithstanding the comments I just made, if you go back and you look at 2008, '09 and how we came out of that given our current CMS kind of portfolio at that point in time and then kind of during the sequestration in the teens, the beginning of the teens in the 2000s, both times we were able to show good, stable, actually some operating profit growth under those scenarios. And if anything, we're even better positioned than we are right now. So Valerie, maybe over to you and give a little bit more color commentary on some of the specifics.

Yes. Thanks, Kevin, and thanks again, Sheila, for having us today. We look at the budget, could be a little bit flat, maybe a few years out, maybe declined. But the top priorities over the next 5 to 10 years really will remain the same, regardless of the administration, protecting the U.S. from our internal/external threats and really preparing for increase rivalry between the U.S. and China and Russia. And when we look at the work that we do, we are positioned well. The Critical Mission Solution competes in a number of those military growth areas that supports the main defense mission, the national security space, intelligence community, federal cybersecurity, missile defense, hypersonics. In all those areas, they are areas of growth for us right now. I think some of the aspects we see from COVID also will accelerate the digital transformation of the DoD as that side of the economy has had to learn how to handle both physical distancing as well as teleworking, and that's an opportunity area for us as well looking forward into the markets. The market is fragmented. And so even if it's flat or declining, we've been able to gain market share in areas and we've shown that like on our IRES contract or HTASC, a few of those other major wins that we've had. So we play upon the fragmentation of the market. We look at our core skills. We play the adjacency, and that's really how we've been able to win work even during flat and declining periods of the market.

And we'll get into telework and the impact of COVID in a bit. But I want to talk about the healthy pipeline. You guys have been growing the business. How do we think about the pipeline versus the current market -- current portfolio? And what markets are maybe overweight in the pipeline relative to the business today? And what does the opportunity set look like?

So again, I'll have a contextual comment made, Sheila, and then you got the expert here with me in terms of her providing some additional perspective. We feel really good about the pipeline within the CMS business specifically. And I'm assuming that's what your commentary is about is that CMS pipeline. We have well over $35 billion of a pipeline that is currently in place. And if you peel away just the nuclear pieces of the pipeline, it really gets at kind of where we are positioned from a strategy perspective to be more aligned with what we're thinking about in terms of gaining access to fragmented parts of the industry which allow us to have greater margins longer term. And so I'd make that comment that this pipeline is higher margin then what our current burn rate looks like as it relates to the business. It's higher pipeline than what it was a couple, 3 years ago, and it continues to build over time. So I think the strategy that has been put in place by the CMS organization, which Valerie is a big part of driving that strategy, has been really fundamentally sound, positions us for a good future. And maybe over to you -- to Valerie to give a little bit more color commentary on that.

Yes. We're super excited about that pipeline right now. Over $10 billion right now is in source selection, and we're looking to see that come to fruition here in late '20, into '21. If we look at the rest of that pipeline, we don't really speak about specific bids in there. But I can tell you we've got a lot of bids that are in the $300 million to $1 billion-type scale. We are very focused on expanding a bit more into the Department of Defense, and we're looking at opportunities with the Air Force and the Navy, in particular, with our KeyW acquisition also that we've expanded our portfolio into the intelligence community. So if we take a look and see what's in there, we'll see a bit on that side of our portfolio as well. We are looking at our NASA portfolio and our track record there. I think that's -- some of the calls and experience and technical capabilities there, that's actually working in our favor there with some of our national security space opportunities. So a little bit of color. We continue to really like our long-term enterprise contracts, those multiyear contracts that give us a great stable base of revenue, low capital intensity. So that's a nice piece of our portfolio, and we are complementing that with how we're looking at the GWACs and IDIQs and getting a little bit of a mix there and seeing how do we balance the longer-term margin for the business, which varies between the different contracting vehicle. And Kevin said it, too, which is -- the opportunities we're looking at are more in the higher-value space, a bit more of the C4, C5ISR, some of the analytics, the cyber side, pretty strong trends there in our portfolio. We recently just brought a new VP of Cyber ,a really good industry hire. And so that strengthened that part of our portfolio as well.

That's helpful. And then, I guess, shorter term, you've talked about some of the COVID impact and what that does. It seems temporary. Can you maybe walk us through some of that? And then when you think about some of the positives around cyber, health care facilities, life science, how do you think about the sizing or the timing of opportunities and potential areas of opportunity?

Yes. Sheila, thanks for the question. Look, we spent a lot of time on our last earnings call, purposefully to provide detail and perspective as it relates to what's going on, COVID. As you know, our second quarter fiscal year -- the second quarter of our fiscal year 2020 ends March and -- ended in March, and so we had the preliminary views of how that was developing, provide a perspective on what we thought the -- our Q3 would be, which is the quarter ending June. And I think there was a lot of time spent because we want to make very clear on one thing: We do not see a fundamental change in demand profile relative to our portfolio. What we do see is some challenges in terms of the physical distancing issues associated with where we are doing work, whether it's some of the intelligence community work where skiffs and limitations on how many people we have in skiffs at a particular point in time; whether it's nuclear remediation, where we just were not able to get on site because of some of the physical distancing constraints; whether it's some of the work that we do with the auto industry. We do a lot of wind tunnel kind of R&D-related activities, and those facilities were closed down. So all of these things added up, and so we wanted to be very clear that the short-term challenge of Q3 is exactly that, short term. And that as we continue to have dialogue, not only with CMS clients, but our People & Places clients as well, it's clear that there is a developing trend towards the customers becoming clear as it relates to how they're going to be managing the business and they're going to be coming back online. So that strategy or that clarification on Q3 challenge is starting to open up over the course of Q4, and the physical distancing gets figured out. I don't think it's going to go away. I just think it's going to be figured out, and we're going to work with our clients to figure that out. By the time we get to the first part of our fiscal year 2021, which starts in October, we feel like we'll be largely past the dynamic. Now the interesting part is the challenge associated with the near term is now being augmented with additional opportunities, specifically to your questions about whether there is opportunities associated with our electronics business and our ability to have incremental capacity built into computing capacity and whether that's bandwidth or whether the -- whatever that is. That's data center capacity, which we do a lot of work in our PPS organization. There's 5G that we do in CMS. We do ultimately a lot of work and a leader in the industry as it relates to pharma business, and so I can assure you that the level of intensity associated with our discussions with clients in those areas is about as high as it has ever been. And while in the short term, still dealing with some of the issues associated with not being able to be on site, longer term, medium term, actually near term in terms of people thinking about reshoring, coming back to the U.S., thinking about different supply chain programs associated with the opportunity of understanding that the new world and the supply chains associated with the new normal need to be thought about differently, those opportunities are becoming real. And so we're very much involved in material discussions on data centers, on semiconductor capacity and in terms of pharma investments, whether it's reshoring or whether it is solving the COVID-19 situation. All of that's really exciting for us. And we see that playing out in the -- kind of in the next 3 to 6 months where we probably enter 2021 with some pretty robust opportunities in front of us.

That's super helpful and the reshoring point as well. I guess where -- when do those RFPs pop up as the government seems to be very reactive at the moment? How do you think about the timing of those RFPs converting to revenues? Is it 1 year? Is it 3 years out, 5 years out?

You want to take that one relative to the government side? Valerie?

Sure. We're seeing -- yes, definitely. So for CMS, we've seen actually a few things already, kind of smaller, near-term activities, whether it was in our 5G portfolio, where some of the telecommunications majors are evaluating and saying, nope, they want to go faster, right? So on the telecommunications side, we're seeing RFPs come in already. But then looking at how the federal government would potentially invest heavily in this area, that could be on the 1-, 2-, 3-year time period on the telecommunications side. On the cyber, we've seen some near-term COVID-support-type RFPs already, the smaller ones. I am anticipating a real acceleration, though, when it comes to kind of the whole package services of cloud, AI, machine learning, data analytics. Now I'm hoping those will start popping in a year or so, but I think we'll see an acceleration there.

That's helped. And then just maybe this is more shorter term, what are you seeing in the hiring environment right now given the headcount-focused business? I think you're investing $100 million and retaining talent. Can you parse what that investment is going towards?

So I'll take the first stab, and then Valerie can talk about a lot of work that's being done in CMS relative to talent because it is a war for talent in government services side with some of the high -- more technically-oriented parts of the business. So look, we've gone through a very large cultural transformation over the last 4 or 5 years. Steve and I came about 4 and 5 years ago, and we started a process that was really important, we thought, in terms of creating a reconnection with our talent pool across the globe. And we have seen a continuation of a reduction in our attrition rates over time. There are still hot spots out there. We all know where they are relative to the talents and whatnot. But I will tell you that we have seen a continued reduction in attrition rates, and I think we are probably -- when you look at it collectively across the entire organization, I would say we're probably getting very close to, if not already, best in class in terms of those attrition rates. I think CH2M is a perfect example. When we bought that company, and that was December of '17 when we closed that transaction, that was 1/3 of our business. So it was a major, material acquisition that helped fundamentally enhance our portfolio of offerings, including some of the nuclear and environmental work that they added to the portfolio. But we have seen a continuation from almost day 1 with CH2M where we have reduced attrition rates from the get-go, and that has continued now 2.5 years into it. And so look, as it relates to CMS, there is certainly those areas that we all know are challenged from retention in terms of the D.C. area and so on and so forth, high-profile areas. But I can tell you that the team is doing a really good job on CMS as well, and we're pretty excited that we've started to make some progress in that regard as well. Valerie, anything to add there?

Yes. No, you've got it. Certain parts are a pretty tough market. I think the word is really out about Jacobs and the approach we've taken during COVID and the fact that we are protecting jobs. We're protecting people and their benefits and that we're an outstanding employer. We're the place to be. And I think we're seeing some of the benefits from that. There are some individuals from some of the smaller companies that have been impacted, and I believe they're going to seek a company like Jacobs as far as their long-term employment.

The one thing you would ask about was that, that $100 million of investment for the people. And so look, when we looked and we did our strategic evaluation of the various scenarios and the physical distancing issue relative to short-term dynamics because we fundamentally believe there was not a demand issue for our portfolio, we took the gross impact associated with that. And then we're very aggressive in terms of reducing and mitigating some of the impacts associated with that. And so the net impact at the end of the day is this remaining $100 million that we've said we are keeping our people, we are taking some issues associated with productivity as it relates to the dynamics, so investments in people, productivity loss. So that we have, ending up, as the demand, since it's not changing, kind of comes back online because of the reduction in the physical distancing challenges that we're seeing in the short term, we believe that we're going to be back at it. And whether it's at the beginning of Q4 or at the end of Q4 or into 2021, these are important, talented people that are going to be a critical part of creating those solutions that are unparalleled for our clients. And so we've made that choice, and so we think it's the right thing to do. We think it positions us competitively advantaged, and we'll be right at it and right back at it as we get back online.

That's helpful. I've wanted to talk about 2 near-term drivers. You have 2 recent awards. The first is the Navy intelligent asset management contract, and the second is an Air Force R&D of rocket propulsion technologies award. How do you think about the ramp on these 2 programs in CMS, Valerie, maybe for you? Any other larger DoD programs that are in the ramp process?

Over to you, Valerie.

Sure. These are 2 really exciting wins for us because they kind of are right there, the centerpiece of our strategy and how we're expanding our client base, how we're seeing a Navy win and an Air Force win, particularly space force for us. These 2 contracts were awarded, and we started and actually mobilized on-site by April 1. So in the midst of COVID, we were able to work with our clients, do all the necessary logistics for bringing people on onboarding, security clearances. It's just an interesting testimony to some of the strengths when we're dealing with our long-term enterprise contracts. We're really experts in that area for bringing people on and getting established. The first contract would be the Navy intelligence, the -- sorry, the West Sound base operations support contract. That one is an intelligent asset management contract, where rather than kind of going in and dealing with your basic maintenance activities and reliability, availability of your assets, we've used some technology and a different approach called intelligent asset management. It's reliability-centered maintenance but with predictive analytics, so pretty technical. We're ramping up quite quickly on that one. And by the -- really, by the beginning of the fourth quarter of this year, we'll be fully ramped on that contract. That's an 8-year contract for us, so we're pretty excited on that one. The other one is the Air Force Raptor contract, and that one is a very deep, technical project for us. And it really is around taking and doing R&D to support and how do you help turn a spacecraft and high-propulsion concepts into realities for our nation's war fighters, so it's a very technically centered contract. It's an 8-year contract. That one is going to take us about a year to fully ramp up to a bit deeper technically on that. So I think these are kind of indicators of the types of contracts and the portfolio shaping that we're doing in CMS.

That's helpful. And then [ that ] said is the largest part of CMS. How do you think about the ramp for NASA with Artemis potential first launch in 2021? What's the trajectory of the NASA business? And maybe any potential near-term pursuits or upcoming recompetes?

So look, I think we're pretty excited about NASA given the 2024 launch of Artemis. And it is clear, it's been delineated and positioned as a high-priority area of spend for the current administration and we would imagine any administration going forward. And I think the important thing to say before I turn it over to Valerie on any specific additional comments is that the Artemis project and the 2024 date is an important date. And that given the lunar kind of structure of things, ultimately, if that date is not hit, the launch is delayed. And it's not delayed a week or 2, it's pretty substantial. So I think that there is a critical nature associated with reaching that. We are at 8 of 10 NASA facilities in a material way, so we're a very large player there, and we're expecting to see some benefits associated with that. And maybe, Valerie, you can talk a little bit more about some of the things we actually do.

Yes. I mean we've got 5,000 people working to support that Artemis moon program, and we've got another 1,000 people around NASA supporting other programs. And we provide all sorts of services and capabilities, everything from working on the stacking of the rockets to the launch control software to different robotics. We work on the shielding for the vessels as they go up, the heat shielding, so a very broad capability base that we have for NASA across the multiple sites. Just earlier this month, we were awarded an extension at our Johnson Space Center, the JETS contract, and this is going to take us out through 2022. It was another $478 million on that particular contract, so about $1.9 billion overall on that contract alone. And that's kind of what we're seeing. I mean we're very well situated with NASA over many, many years. We are their largest non-OEM provider and continue to bring a lot of value to the program. Our people are undoubtedly excited about all the work going there, and we feel that it will be robust, even as we go through some funding difficulties coming up, meaning the overall federal budgets. I think near term, we had that award. We don't have anything else in the pipeline for reevaluation or rebid until later in '21 and then '22. So as far as upcoming rebids, we're pretty set for the time being.

So as you think about the NASA portfolio, what's -- how do we think about low single-digit growth? Is that the right assessment?

We haven't provided any specific kind of targets as it relates to that, but it's definitely going to be a growth as it relates to the next 3 to 4 years as it's anticipating reaching the 2024 launch. So good growth is what I would characterize, strong growth.

Given the recent extension for West Valley in the DOE and some of the moving pieces across the project site portfolio, where does the DOE portfolio stand at the moment, either with project extensions, new business or recompetes?

Over to you, Valerie.

Sure. So we've got a great nuclear remediation business, even if you look at the U.S. as well as what we've got internationally. Right now, we're on 9 major DOE sites, and we perform all that kind of high-end complex remediation work. These contracts are long term in our portfolio, 5 years, typically with 5 1-year options. So a really good, steady recurring revenue, low capital intensity. So we're really -- we like our remediation portfolio. This year alone, these contracts, depending on where they are in rebids, sometimes you just get extensions. And out of 6 potential extensions this year, we got 6 potential -- we got those 6 extensions. And I think that's part of a testament to our success and the capability we have here. The Idaho contract is the next recompete for us, and that will be probably the second half of '20, so coming up later this year. And Savannah River liquids will be the next one up after that. These things are moving around a little bit with the procurement cycles, with COVID. There are other new DOE projects in the pipeline, though, that are coming up that we're taking a look at, very attractive. So we continue to like this part of our portfolio.

And then I guess I wanted to ask on the Hanford Central Plateau transition. Just where are we with that program, the recent protest denial? And how should we look at the nuclear business going forward?

Why don't you take that one, Valerie?

Sure. This is an area where we've continued to really deliver for Hanford on the Central Plateau contract with all the different projects we have there, pretty much keeping high level of client satisfaction. Looking at the protests and the awards and turnover periods, I feel we're going to be at Hanford through the full first quarter of FY '21. So it will be the first of 2021 before we're completed there. I think we were a little bit disappointed around the DOE's decision on Hanford Tanks, and we're still evaluating that. But even with that light going on, this part of our portfolio is really strong and will continue to be strong across the DOE complex. We bring a lot of innovative solutions, and those tend to be quite valued by the client. So our position is strong, and we'll continue to bid on that type of work.

How large was that program contribution for a full year worth of work from Hanford?

The -- I think it's publicly available, somewhere in the, I would say, $15 million EBITDA.

Okay. That's helpful. And then just turning to People & Places Solutions side of the business. A significant portion of the business is heavily tied to municipal funding as well as local spending, which is under pressure given elevated costs from COVID. How are you thinking about that area of business going forward? And any changes to the customer behavior or bookings that you're starting to see?

Yes. Look, I think the pipeline remains strong on the people & places side. You're poking at a discussion that is being widely held within the investment community as it relates to the state and local budgets and some of their concerns relative to revenue constraints in the short term. So let me contextualize it at first, Sheila, in terms of the size, so that you're clear, and the investors are clear that are joining us. 60% of the People & Places business is public; 40% private. Of that 60%, I would say 33 percentage points of that 60% is state and local. So let's call it, 30-plus in terms of the U.S. piece. And then the balance of that is federal business and ultimately the international business, which can be a combination of federal and/or kind of the U.K. or the Australian version of state and local budgets as well. So if you think about the U.S. specifically, certainly, there are some concerns relative to what is considered to be some pressure on spending, I would say a couple of things. One is that we tend to have very long-term, I would say, enterprise contracts that allow us to ultimately continue to have these long-term relationships with the state and local group, so framework agreements effectively, so whether it's in water or operational maintenance contracts and whatnot. We just won a big one in Wilmington, Delaware, which I think is the largest O&M contract available in the United States actually. And so these are long-term existing contracts that will tend to be through just the execution of necessary work on an ongoing basis tends to be there. Now look, having said all of that, I think there is an opportunity for the CARES 2 Act and who knows how that will play out in all of its gory details. But I would suggest that we believe that there will be a CARES 2, probably be a little bit different than what the Congress has put forth, but there will be something that becomes available. And then, of course, the FAST Act will be extended as we go into 2021, probably not until after the election given the political dynamic of no one wanting to allow the others to say that they're the ones that made it happen. So I think that the combination of all of that will allow us to continue to see some pretty good strength in our, what I would call, our state and local business. We have not seen cancellations at that. We have seen perhaps moving to the right, which we would expect. And so as we think about our discussions with our clients currently, we would expect that some of those things will come to fruition over the course of the balance of this year and then hopefully position us for the 2021 that we've already characterized as being able to get back at it.

And then you called out some recent awards with large private sector clients on the earnings call and the sector being fairly resilient. What type of pipeline are you seeing in that business? And what are some of the biggest risks and opportunities, whether in life sciences, 5G or other sectors?

Yes. There's very clearly a dynamic where COVID is helping our business in developing what we would expect to be a pretty robust 2021 specifically. If you think about the change of working remotely and virtually and people being in different locations, the ability to have bandwidth capabilities, the ability to leverage a different kind of work environment has translated into 5G requirements. It's translated into, which Valerie has already talked about, which -- it's a lot of work in CMS relative to doing that. It's data center capacity, and it's semiconductor capacity. All of those things are being played out real time as we sit here today. And then there's the further dynamic of, okay, given the global supply chain that has been developed over the last several years, there are many that are rethinking what that should look like going forward. And so we're in the midst of a lot of discussions on that dynamic on the semiconductor electronics area as well. If you go over to the pharma side, the pharma side is about as intense as it ever has been relative to the coordination and dynamic of should we be thinking about a different supply chain globally, and reshoring is certainly part of that equation. But then given our position in that business where we are a market leader, we're probably involved in every single discussion of capacity that is currently being discussed and whether that's reshoring-related or whether it's cooperation amongst the various participants in that business to ensure that capacity is available for whatever comes to fruition relative to solutions on COVID-19. All of that is robust and currently in plate right now as we sit here and talk. So I think that's positioning us for a pretty strong 2021. It probably won't help 2020 that much, just because of the timing of when those things would ramp. But the level of intensity is very clear that our client base is working hard to position themselves for making decisions over the course of the remainder of our fiscal '20 and into 2021.

That's helpful. And then can we talk about the international opportunity? Wood's helped, I guess, build that out? And it was a major step towards that. Just what are you seeing internationally?

That's part of our nuclear business, so I'll turn it over to Valerie, who is intimately involved in the strategic evaluation of that opportunity. So Valerie, over to you.

Sure. Our international business before acquisition was at about $500 million. And with Wood coming in, it's a little over $800 million. So it's a pretty robust business. Our business mix shifts. We do both defense work and nuclear work internationally. And it's about 70%, nuclear; 30%, defense at this point. The kind of things we do in the nuclear area, it's a mix of support services, decommissioning, decontamination. We'll do plant O&M. We do a lot of analysis, deep safety basis work, research and development and professional services for new nuclear plants. That combined nuclear business is really -- it's resilient. It's more resilient than the individual entity because we're really able to bring a full suite of solutions to our clients. There's very limited capabilities in certain areas. And by putting our combined capabilities together, we're already seeing new opportunities. And I think this is really going to enable us to expand into the European market, for example. We're doing things like we're investing in a new nuclear engineering center in West Cumbria, and it's situated 1 mile from Sellafield, who's one of our largest nuclear customers in the U.K. And that is going to complement our technology and innovation center in Birchwood, and it really brings all these capabilities together and just better solutions for our clients and allows more growth and expansion than before the acquisition.

That helps. And then just moving on to profitability, you've previously talked about EBITDA and free cash flow growth into 2020 -- into fiscal '21. How do we think about the puts and takes given you have -- you do have some new program wins that are going to ramp?

Yes. So look, I think one of the key messages we wanted to deliver in that Q2 earnings call was this temporary dynamic associated with physical distancing is temporary and that we believe that as we ramp out of it. And let's be very clear that the ramp that we're talking about isn't some philosophical discussion that we have at a high level, it is basically built up customer by customer. And so the level of discussions that Valerie and the team in CMS is having with our government clients as it relates to how they're thinking about ramping up, it's happening. And so we believe that, that scenario that we put together really positions us to be somewhat in line with what we had characterized as this Q3 challenge, improving Q4 for -- then getting to growth in 2021. So I think that all of that is positive. We had put together a strategic review in 2021 -- excuse me, in 2019 that we presented to the investor community in February of 2019. And we put out an expectation that we would be growing double-digit EBITDA growth and start to improve our cash flow conversion over time, and that strategy is still in place. There is nothing fundamentally that we would suggest is different today. And it really is, okay, a little bit of a disruption here given the pandemic, but we're right back at it. And so that EBITDA growth is back on track. I'm not going to really characterize it as double digit or not, but we do think it's too early to see how we come out of this, but we do think it's going to represent EBITDA growth. And at the end of the day, with all of the challenges of this dynamic versus 2019 in terms of our EPS numbers and now 2020 estimate, even after the COVID, it's kind of flattish, pretty much so. So I think it gives a clear indication of, well, survive the dynamic, didn't end up getting the growth that we were expecting in 2020. But since the demand is still there, that bodes well for 2021. I think on your free cash flow conversion question, look, we have had a really good history of improving our DSO performance. We did that in '16. We did that in '17. And then in 2018 and '19, we had significant transformation occurring: the CH2M integration, the sale of our oil and gas business, energy, chemicals and resources. That was a huge transformation that was in place. We saw a little bit of stalling in the DSO improvement. We're now getting back at it. We're investing behind it. Our people are focused on it. We get paid for our annual incentive by how well we do on DSO improvement, and so I believe it's going to happen. And I think that, that then translates into an improving free cash flow from an underlying business perspective to start to be more readily seen. Because the other piece of that equation is the significant restructuring that we had in '18, '19. And now we're coming down to the end of a restructuring where we've characterized $150 million, both in cash and P&L expenditures on the restructuring, which is the tail end of all of those things, and we think that's kind of coming close to the end. There will be a little bit of monies that still fall over into 2021, but it's certainly not going to be $100 million plus. It's going to be less than that. It's going to be tens of millions versus the significant transformation investments. And I will tell you, Sheila, for certainly the benefits of all those that are on the call, all of those investments we were talking about were expected, and if anything, characterized, identified and actually performed better than what we were doing over the course of '18, '19. But it was big numbers. So I think it's actually masked the new actual capabilities of our portfolio as we come out now the other side of the cash flow generative capabilities of it. So we look forward to not having those big restructuring numbers, so people can really see what this company is going to be able to do from a free cash flow perspective.

Yes, quite a transformation. And I guess one question related to that, that might be masked as the impact of improving mix. I think you have higher-margin mix in your backlog. How do we see the transition of that play out over the next few years?

I'll go back to setting the context. And it was fairly consistent with both of our businesses. So both CMS and People & Places was -- we had, had in that strategy that we had talked about in the beginning of February of '19, we had said, look, we -- our strategy is about margin enhancing. Yes, we expect to grow, but we expect to grow profitably, which was an important element of our strategy. And we had, generally speaking, a little bit of variations around the theme, but around 100 to 150 basis points of margin improvement that were expected as it relates to organically how we would grow our business from the 2018 base that we have for each of the businesses. And we think that continues to be the case. And so if you think about where we are in terms of our burn and what we're burning margin-wise now, we think about what's in our backlog, the backlog is higher profitability. And then the pipeline is even further higher than that. It is a fundamental critical part of our strategy, which was, yes, we think growth is important, but it's really mostly important that we go after the right growth, where we have the ability to make that margin profile, which allows us to have robust cash flow, reinvest back in our business long term and innovation and ultimately deliver what we think will be a pretty compelling view of what the company will look like over the next 5 years.

That's helpful. And then moving on to capital deployment. You've been reinvesting in the business, whether that's organic or through acquisitions. You've made 2 decent size acquisitions in the past year: KeyW and Wood. What type of growth are you seeing from these 2 businesses? I know, Valerie, you talked about Wood a little bit already. And how do you think about revenue synergies from KeyW?

Yes. One of the things that's been really pleasing is to see how KeyW has come in. And actually, I think it was within a month or 2, that we closed the deal that we had our first synergy where we actually sold a project, leveraging off of the KeyW technology which was great to see. So I think, in general, we're very pleased with how that integration has gone. Maybe I'll turn it over to you to give a little bit more color commentary on the various pieces of that business. But the pipeline that we see out of -- coming out of KeyW and how that plays out relative to the combination with the rest of Jacobs continues to be pretty exciting.

Yes. It's -- we are pleased with what we're seeing. The strategic logic for that KeyW acquisition is really playing strong in our business. The revenue synergies show an acceleration of growth. We're seeing some in 2020. And long term, we've had some good sites there. Kevin just mentioned that first win that was a DC3 cyber training contract. It's a $40 million contract. We actually -- 3 days after the close, we jointly submitted that proposal and then went on to win it, and that was just a really early identification of the kind of synergies that we can see because we couldn't bid those as individual entities. We come together, and right away, we're bidding and winning. And we've had a few other -- we've had several other wins there. We had a microelectronics engineering project. We had a critical mission software and hardware engineering engagement, both for classified contracts. We've had the cyber assessment and monitoring that we're doing for the U.S. Patent and Trademark Office, and we just did a DevOps contract for the FBI electronics lab. So we're seeing nice revenue synergies coming in from the acquisition. So KeyW has performed well since we closed. I think the ramp to the space ISR part of the portfolio is just a little bit lumpier. That one was a little bit more of a challenge to predict as far as how the client is working their programs and the funding. This is a long-term strategic investment for us. It's not a short-term play on that part of their portfolio. And that part of the business, really, they just won a multimillion-dollar satellite payload risk reduction and a technical maturation program. So we're seeing wins, and we're seeing a broader opportunity set in that ISR part of the business than when we first evaluated and did our diligence. So I think we're going to get some short-term boost on that side of the portfolio with those wins, but it is a long-term play for us. So overall, we're happy with our KeyW acquisition.

And then I guess just one last one for you guys. Thank you for the very informative answers overall. How do we think about how you deploy your balance sheet from here when you start thinking about M&A again or given your leverage is pretty low at the moment?

Yes. Look, Sheila, it's a good way to end. I think that one of the benefits of the transformation has really positioned us to have a greater stability in our portfolio, oriented around high profile, really imperative growth areas for not only the U.S. government but for some of our private clients and those around the globe as well. So we're excited about those opportunities. Given that transformation, we really like our organic play right now, not to suggest there aren't opportunities out there that would be of interest to us. I would have a question, though, whether or not sellers' expectations have adjusted appropriately given the current dynamic because the reality is it is a different world going forward. And I -- combine that with our current share price right now, I would say that the kind of the priority might be a little bit different today than 3 to 6 months ago. I think that the other point is we were fortunate, as part of our overall strategy, to have gotten the $1 billion term loan. We finished that. Had nothing to do with COVID. We finalized that deal in the midst of COVID. We kept the cash, just to ensure that disruption because of COVID didn't kind of leak into the capital markets and the debt markets. I think it's becoming pretty clear that the Fed is stepping up and doing what they got to do, so we'll probably pay down our revolver at some point in time here. And then we're, I would say, probably a little bit more inclined to do one versus the other in the share buybacks versus M&A, just because of kind of the developing dynamic with COVID. And we love -- we love our organic growth opportunities.

That's clear. You know what you're getting, at least. Thank you very much. Thank you, Kevin. Thank you, Valerie, for answering all our questions, and we very much appreciate you joining.

Very good. Thanks, Sheila.

Thank you, Sheila.

Thanks.

Okay. Take care.

Thank you. Bye.

Bye-bye.