KBR Inc (KBR) 2017 Q2 法說會逐字稿

Good day, and welcome to the KBR's Second Quarter 2017 Earnings Conference Call. This call is being recorded. (Operator Instructions) For opening remarks and introductions, I'd like to turn the conference over to Nelson Rowe. Please go ahead.

Good morning, and thank you for joining us today to discuss KBR's second quarter 2017 financial results. Joining us on today's call will be Stuart Bradie, President and Chief Executive Officer of KBR; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stewart and Mark will discuss KBR's financial and operational results, market outlook and the earnings expectations for the remainder of 2017.

Please refer to the presentation that is posted on our website in the Investors section of kbr.com. Following their prepared remarks, we will take your questions. Today's call is also being webcast and a replay will be available on KBR's website for 7 days at kbr.com. The press release announcing KBR's second quarter results and second quarter Form 10-Q will also be available on the website. Before we turn the call over to Stuart, I would like to remind the audience that today's discussions may include forward-looking statements, reflecting KBR's views about future events and their potential impacts on performance. These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in KBR's second quarter's earnings press release, second quarter Form 10-Q and current reports on Form 8-K, and you can find all these documents on our website at kbr.com. Now we'll turn the call over to Stuart.

Thank you, Nelson, and thank you, all, for joining us this morning. Starting on Slide 3, Safety. Our path towards achieving Zero Harm continues. This Safety is, quite simply, good business. Looking after oneself and those around us is core to our culture. As a people business, I'm pleased to report our total recordable incident rate reduced by 60% over the past 13 months, and continues to improve into 2017. The credit goes to every single person at KBR. This, like all we do at KBR, is a team game, and I thank them for their commitment.

Onto Slide 4. Owing on from a good start to the year in Q1, quarter 2 saw positive performance across all areas of KBR's business. Revenue grew by 8%. Our earnings results, on more predictable business mix, gives us confidence to raise guidance this quarter.

Project execution was strong, with projects meeting or exceeding expectation, including our remaining lump-sum EPC project in the U.S. Our continuation of derisking the business with resolution of a number of legacy issues was pleasing. The key matters are highlighted on the slide: resolution and payment of the long-standing PEMEX dispute and positive judgments in our favor on both the Private Security and Burn Pit cases. Government Services delivered strong earnings, with backlog growing in the quarter. Technology & Consulting delivered good margin performance, with an increasing and attractive pipeline of opportunities, and E&C benefited from solid execution and less reliance on megaprojects, as our strategic shift into a more stable and recurring revenue base continued to derisk our future. Overall, backlog remains high, and consists of work with less volatility. More wins for KBR Wiley are highlighted on the slide to give you a flavor of the type of work we won in the quarter.

First, high end technical support services contract over 5 years for NASA's satellite program at Goddard Space Center; differentiated base operational support for the U.S. Navy at Diego Garcia, an 8 year contract currently under protest, but with resolution forecast in Q3, at which time, we'll include it in backlog; high-end engineering and technical support services, supporting the Department of Defense missile program; and a multiyear seat on NOAA’s satellite contract, $2 billion program. These highlighted wins show the value of our life-cycle strategy from technology and domain expertise to high-end engineering and program delivery and across operations and maintenance. Book to bill for Government Services in the quarter was 1.3. In addition to solid execution, positive earnings, winning the right work and resolution of legacy issues, our associated cost management performance was excellent in the quarter. This allowed us to deploy capital in a disciplined manner, with paying down debt and returning capital to shareholders via share repurchases in addition to our dividend. I will now hand over to Mark, who will take you through the numbers in more detail.

Great. Thank you, Stuart. I'll start on Slide 5 of the earnings presentation. Overall, our performance was on or above planned for all guidance metrics in both Q2 and also on a year-to-date basis. As Stuart indicated, this, coupled with our outlook for the second half, is the basis for bumping up 2017 guidance at this time. More on this in a bit. For Q2 2017 itself, revenues grew 8% to $1.1 billion, Government Services driving that result. We saw a sequential growth of 5% in Government Services from Q1 with recovery from some contract administration related delays earlier in the year experienced in some of our Wyle contracts and ongoing growth in both our overseas military support operations and in our U.K. and Asia-Pacific Government Services businesses. Top line in our Technology & Consulting business was down primarily on mix. Strong margins offset this on the bottom line. Engineering & Construction revenues declined as planned, as we worked down projects nearing completion. Our focus here is to continue strengthening our new business pipeline on a disciplined basis, as we discussed with you in our Investor Conference in May. For profitability, gross profit plus equity and earnings came in at $140 million for Q2 or just about 13% of revenues. After adjusting out for nonrecurring favorable items in Q2 for both this year and in the prior year quarter, including PEMEX, segment profitability was about 9%, up over 1% from 2016 on an apples to apples basis, with all 3 segments operating within the targeted profitability ranges that we have shared with you.

General and administrative expenses were $38 million in Q2. That's about $4 million to $5 million above normative level, with a number of one-off items, like severance and facilities costs, but we expect this to return to normative levels in the second half. The effective tax rate was 22% in Q2, benefiting from a more favorable jurisdictional mix and a modest discrete pickup in the quarter. We are taking our expected effective tax rate lower for the rest of the year, as the jurisdictional benefit is expected to continue. Fully diluted earnings per share was $0.54 in Q2, and was $0.57, excluding legacy legal costs. As we indicated in the Investor Conference in May, the PEMEX benefit was a net $0.19 earnings per share benefit in Q2.

Finally, operating cash flow was a healthy $325 million. PEMEX contributed $344 million of that result. As planned, we have significant working capital outflows for projects nearing completion, but these were nearly offset by cash earnings strong collections. Indicatively, day sales outstanding improved to 75 days, down sequentially from 79 in Q1 of this year, and down from 77 in Q2 from last year. Working capital management will remain a high priority to free up cash for other purposes.

Slide 6 provides further details on the Q2 results by segment, but I’ve already covered the major takeaways for the quarter, and also how the segments contributed to our results.

Slide 7 summarizes our cash flow generation, our cash position, our cash deployments in the quarter. $325 million operating cash result almost converted dollar for dollar to free cash flow, with only a net $3 million of capital expenditures. Accordingly, free cash flow came in at $322 million in Q2. We deployed much of this cash in a balance delay, as Stuart said earlier. We reduced debt by $180 million, used $50 million to return capital to shareholders via open market and stock repurchases, and we paid $11 million in dividends. We increased our ending cash balance by $81 million, and with all of this, reduced our net debt to effectively 0.

Let me move on to Slide 8 in the presentation. As I said earlier, with performance halfway through the year and strong visibility into the second half, we are upping guidance a notch for both EPS and operating cash flow. The higher EPS reflects some improvement within our original EBITDA expected range and an improvement to both our effective tax rate expectations and the lower share count from the buybacks we made in Q2. For cash flow, we still expect net operating cash outflows for the second half, driven by working capital uses associated with projects nearing completion. However, we are comfortable raising the bottom of the guidance range to $120 million from net operating cash flow for the year and the top end at $200 million as it was before.

In terms of timing, as we've indicated since the beginning of the year, we expect total revenue volume to reduce pace in the second half as we ramp down on EPC projects nearing completion. At the same time, some of those projects running at or near breakeven expect margins to rise in the second half as we said before. With that, that covers the highlights of Q2 financially, as well as the outlook and guidance update and back to Stuart for finishing remarks.

Thank you, Mark, and now on to Slide 9. What to expect in the second half of the year that supports the guidance that Mark has articulated. We're committed to the guiding principles we laid out on Investor Day, and these are shown on the left-hand side of the slide, our focus on bottom line performance, underpinned by winning the right work. We continue to train and recruit for and deliver stronger business document across KBR with appropriate commercial discipline. And our commitment to developing our people is unwavering, as we continue to build upon our evolving high-performance culture.

So for the right side of the slide, performance expectations for the remainder of '17. Growth in Government Services will continue as planned. We saw a sequential growth in legacy Wiley HTSI and KBR U.S. Government businesses from Q1, and the U.K. and Asia-Pacific businesses performed well also. In T&C, our strong prospects pipeline and margin performance should see this business grow in Q3 and in Q4. And in E&C, as we previously reported, we see revenue softening in the second half, as legacy 0 margin projects come to a close. This will, in turn, lead to better margin performance in this segment in the second half. Importantly, the pipeline of opportunities gives optimism for backlog growth in Q4 and early 2018.

Please note, however, there are increasing portfolio of smaller projects, services, program management and maintenance contracts, gives E&C a more solid foundation than in previous years. And what does this mean to the bottom line? Continued underlying profitability improvement and more predictable earnings growth. We do expect additional scope and change on the reimbursable components of an LNG project, which would lead to timing dilution. Albeit, this is good news. Note, this has been taken into consideration in the EPS guidance Mark gave previously. From a cash and liquidity perspective, we're bumping up positive annual operating cash flow to $120 million to $200 million, with conversion rates improving, giving our business mix and improving cash management. In our key markets, in all 3 segments, we are well-positioned with backlog growth opportunities, and we stand by our growth projections presented at Investor Day.

On to Slide 10. In summary, our disciplined approach to executing on strategy has led to improved and predictable earnings momentum, giving confidence to raise guidance: growth in high-end and differentiated Government Services work, strong margin performance in Technology & Consulting, with growth in the second half; solid execution, which is the best business development an E&C business can do; a growing pipeline of opportunities with firm and growing foundation of smaller projects and recurring revenue OpEx relationships. For KBR, as a whole, secured backlog was maintained at a high level, and if option years are included from the multiyear Government Services contracts, our book to bill of close to 1 was achieved. We have solid prospects across all 3 segments and in E&C, where we've seen a marked improvement, awards our forecast in Q4 and early 2018. Resolution of legacy issues continues to derisk the corporation, and we have a laser-like focus on cash that has delivered a strong liquidity position, giving confidence to deploy substantial capital, reducing our debt position, and via share repurchases, returning capital to shareholders. I will now hand over to the operator that will open the call up for questions.

(Operator Instructions) And we will first go to Brent Thielman from D.A. Davidson.

On the Government Services side, another quarter of solid bookings. Moving into the second half of the year, does the environment look as robust in terms of potential new opportunities out there as you've seen year-to-year to date?

Yes, Brent. First, thanks for the call. We discussed our pipeline in Government Services back on May 12 at our Investor Conference. It's very robust. There's still a lot of undecided items out there, and while it's hard to predict in any one quarter, Q3 is notoriously a strong quarter for bookings in the Government Services sector, and then you generally see a downtick in Q4. We're expecting to see ongoing strength in not only our pipeline development, but the adjudication of that pipeline and a recurring strong win rate. So we're optimistic about ongoing strong bookings, collectively, over time, being at or above 1.0 from a book-to-bill perspective. Hard to predict any quarter, but we're optimistic about the second half.

Okay. And then I guess, on the guidance for this year, appreciate we're only midyear at this point, but the low end of $1.25 looks pretty conservative based on what you've done here year-to-date. Is that mostly hitting handicap E&C and possible further customer malaise beyond 4Q, maybe some timing of government contracts to consider?

Brent, I think, I mean, it's a good question. Since my time at KBR, this is the first time that we've increased guidance through the year. I think the important thing is the directional piece of this. We don't want to overpromise and under deliver. We're being cautious. We still have some risk that exists in the business, but I think the important piece here is the directional movement of the company.

And we'll now go to Tahira Afzal from KeyBank Capital Markets.

I guess most question -- I mean, Government Services was really for me the big highlight, really strong good -- revenue growth sequentially and the equity income line was pretty strong. Should we be looking at that $18 million as sort of the benchmark, going forward? Or could you provide any color if there's a little bit of seasonality or if there was some one-time nuisances in that?

Tahira, as you'll see in the 10-Q, if you got there yet, we did have a favorable prior period adjustment in equity and earnings for GS, and so a more normative level is in the 10 area on a per quarter basis. That's still up year-over-year from growth in our Allenby and Connaught or Army 2020 work, and the initiation or the early stages of our military flight training school, PFI in the U.K., So that is growing. So that area is growing. That's, I think, the highlight, but we did have a favorable bump that you'll want to factor in, going forward.

Got it, okay. That's very helpful.

I mean, Tahira, just on that for a second, I think the other piece to take into consideration, Mark said it right, it was that one-off. But the -- I think, directionally, we will peak in construction on Army 2020 through into '18 and into '19. So I think, directionally, that's the way that, that moves. And obviously, the uptick in MSDS earnings will also help in that area as more of the airplanes get delivered through the remainder of this year.

Got it. Thanks, Stuart, that is helpful. I guess, second question. If I was to flip through your Analyst Day slides, I know where oil is trending today and what the outlook seems to be versus what you're assuming, while still conservative, does expect some bounce back. How sensitive do you think your near-term pipeline of E&C project is to where oil is in the near term?

Tahira, as you recall, at our Investor Day, we were at great place to show that less than 8% of our business is exposed to oil and that -- but our correlation of our share price to the oil price was about 83%. I mean, our business is very gas-facing. I think that where the E&C and the technology business are pointing is very much on the Gas Monetization side. And again, I think that there'll be priorities in CapEx spend, as there always are, but even more so now. And I think the low gas prices in the U.S. is where many of the IOCs, and particularly, the chemical companies, of course, are focusing their attention, and I think KBR is very well placed there. And in addition, obviously, the Middle East is the other area because of other factors that they – following the Arab Spring for employment, and things like that, that they need to diversify their economies to create employment. And again, I think we're very placed there. So I think, really, the -- we believe that oil is more for longer. That's we’ve positioned the company that way over the last few years. We do think gas is the fuel of the future, and that's why we -- our exposure to oil is quite minimal at this point.

And we'll now go to Brian Ruttenbur from Drexel Hamilton.

Couple of questions. First of all, to follow-up on the backlogs, it looks like your book to bill on Government Services was around 1.3. Is that right on a book to bill basis in the quarter?

Yes, Ryan. That's correct.

Okay. And then you expect it to be even stronger in the third quarter. I don't want that to be my follow-up question.

That was not my precise answer either. So I said that Q3's historically strong, but I would not make a prediction it's going to be stronger than 1.3. Over time, we seek to be above 1, and conducive to our long-term growth rates, plus a little bit of cushion for the things that eventually dropped off.

Okay. And then my follow-up question is about your cash balances and uses of cash moving forward. There seems to be some things out on the market on the Government Services side that I'm hearing about. Is that the way you're going to deploy cash? I mean, you've been, obviously, paying down debt, as well as buying back your own stock. Are you going to make more acquisitions on the Government Services side, i.e, are you positioned and ready to do that?

At our Investor Conference in May, we're pretty clear about where we'd be looking from an acquisitive point of view, and across the areas, one was technology. One was more in the sustaining capital in the area of E&C, and the other was Government Services, as long as it took us sort of further, I guess, up the food chain, and in technical differentiation and/or geographical coverage, and that continues to be the case. As we all know, you've got to kiss a lot of frogs because you've got to find cultural -- cultural -- companies with a good cultural affinity. You've got to get a good price. And as I've said, often, we are not going to acquire for cost synergies. So you've got to find something that really sort of drives revenue synergy as you put the businesses together. Because as a people business, you want people to be excited about the future and not worry about their job, and so that's the way we look at it, and yes, we continue to look in the market. Yes, we continue to look for opportunities, but they have to be accretive on day 1, and they have to meet the criteria we laid out at our Investor Conference.

And we'll now go to Rob Norfleet from Alembic Global Advisors.

This is actually Nick Chen for Rob. I was hoping you guys could just give a little more detail on the types of technologies that companies are licensing from you, and sort of what the typical pull forward rate of those licenses been in terms of resulting in an EPC contrast?

I mean, the activity in the technology space is interesting, and we're seeing a lot of activity pick up in ammonia and where we've pulled through into EPC a number of times. We’re seeing more opportunity there and greenfield than we've seen for a while. We're seeing a lot of activity in the refining space as refiners are getting, obviously, cheaper crude, and they're looking at how they can sort of particularly take the bottom of the barrel and add value from that. So we're seeing a lot of activity. We've got 3 or 4 technologies in the refining area. We're very, very busy. Our polycarbonate technology is getting a lot of interest, particularly, in China. So that's also an exciting part of our future. We just acquired that a couple of quarters ago, and we're seeing some good, good momentum surrounding that technology. So I think, really, our technology business today, its prospectivity and the number of opportunities that are real and robust in the pipeline, are probably at a level that's higher today than I've seen it in the last 3 years I've been with KBR, and our win rates are actually pretty strong. So we feel really good about the future of technology. I think that where we pull through into EPC is where it makes sense for us to do so. We're not going to take -- go and build EPC plants in China. For example, the Chinese can do that, as well as anyone in their own country, so why would we go there and take that -- those sorts of risks. So we're only going to do it in jurisdictions where it makes sense, but I think the key point is that the Technology & Consulting business gives us some really good optionality in that sense, and that's technology. On the consulting side, that's quite different, because we really saw advising very early on, on concepts and pre-feed type solutions, and we're seeing a lot of pull through in that area, and there's quite a (inaudible) of sort of that past and current projects where that's the case from what we're doing with BP across multiple projects today, what we've done with Chevron in the past, what we're doing and potential working with Shell in certain areas as well. That's -- and also with the chemical companies and with people like Exxon. So there's -- it's a very strong project pipeline in the consulting area, and the ability to pull through is substantial.

That's great. And as a quick follow-up, can you just talk a little bit about what current bid margins on recent contracts look like relative to the legacy backlog?

There is -- this is Mark. I'm not sure if you're talking about a particular segment or overall in our business. But I would say that in the Government business, as you've seen others say, there is a little bit less low price, technically, acceptable pressure in the marketplace, as customers have realized that quality of delivery and capability, and thus, performance really matters, and so we and others are seeing relief there. And so, if anything, that's an uptick to confidence of big margins improving, albeit, slightly in that area. Not to mention our ongoing efforts to reduce costs to improve that result as well. I think E&C, as Stuart has mentioned in our Analyst Day, is going to come down to us being selective by being involved very early, and what he was just referring to in consulting on the early stages of a project and technology insertion, which together, gives us an advantage, and hopefully, a good bid fee result that gives us a return commensurate with the risk there. So what's really important to remember is to -- relative to the recent past to avoid lost contracts by being disciplined and selective, and besides that, I think the overall E&C margins, once you get in, are roughly the same as what we've seen in good projects.

And we'll now go to Chad Dillard from Deutsche Bank.

This is Eric (inaudible) on for Chad. So was wondering, so if you look at the 4Q exit rate implied by second half dive, it's just about $1.10 earnings as a starting point for 2018. How do you bridge that figure with your 2018 guide of $1.25? Where do you see the growth coming from there?

As we've said, we have -- we're expecting to see ongoing growth in our Government Services and Technology & Consulting business through '17 into '18 and beyond, and we expect to restore growth to our E&C business in the 2019 timeframe. If you'll recall, we guided flat for '17 to '18 transition for E&C, which means we still have to win quite a bit of work in late '17 or early '18 to achieve that result, and those are the contributors to the top line growth, and we don't expect a wild change in margins year-over-year, and we expect, of course, to rid ourselves of the margin dilution we had, particularly, in the first half of this year from the let-down of at or near 0 profitability projects in E&C, plus some dilution on projects, like our LNG project in Australia. So the combination of the top line growth and the work through low-margin contracts in '17 or a cleaner margin story in '18 is what would be the driver.

Great. And actually, I guess, focusing on sort of LNG earnings and the cadence from '17 and '18, when do you expect to get this to start contributing to earnings?

I mean, the excess will carry on into 2018. The customer has gone to market to say the first train will be ready, I think, before year end and the second train by the middle of next year.

(Operator Instructions) We'll now go to Michael Dudas from Vertical Research.

Yes, so I missed -- focusing on government services group, you talked about you were going to have this -- the project that's in the third quarter that's under protest right now could fall in? Are there any other municipal project that we might see flowing to that same category through the second half of the year? And just talk about some of the new business you're picking up on the margin side. I assume it's majority (inaudible). Is there any other requests or opportunities from the client base for big priced services or any other type of opportunities that could actually add a little bit of work to the margin and (inaudible)?

Okay. Michael, the biggest item, still under protest is the Diego Garcia opportunity in GS. That's a $500-plus million win that we originally announced, at least, 3 months ago, and so that will -- the protest period ends in August, so that's days away from knowing the outcome of that, but we'll keep you posted, and that would be a Q3 booking, should that occur. There are no other major projects in protest at this time, and I think you know of the major broke procurements we've talked about in our May 12 dialogue. There's nothing major new to add to that. Relative to your second question, we are deliberately looking for opportunities to create demand, where a customer has a requirement that is not being met, and to at least have the opportunity to deliver that on a fixed-price basis in areas where we have past performance and capabilities. And so that's part of a longer-term directional goal to improve our mix in our government services business, which is dominantly cost reimbursable today, but in a measured way to find opportunities where fixed price is acceptable to the customer, acceptable to us, and offers an opportunity for shared benefit with the customer and us. Nothing particular to talk about this time, but we are certainly thinking about the life cycle approach, where for example, we are providing human science and performance work with NASA and we see opportunities in the military, like special forces and things like that, and hopefully, can do so on favorable contract terms in the future.

I appreciate that color. And just to clarify on the defense side, anything...

Michael, do you mind speaking up just a little bit? We're not hearing you real clearly.

Sure. Can you hear me better now? Just recognizing so you talked about in May and some of the things going on in Washington, any significant changes, positive, negative, from your business planning aspects for contract awards or opportunities, say, through first part of next year?

We think the Washington environment is, as we said in May 12, overall favorable from a policy perspective. I mentioned LPTA a moment ago, as that's easing a little bit. We see increases to the defense and intelligence budgets, which overall, is good for us in the U.S. And we see some of that in the U.K. and Australia as well, but no major change to that theme since May 12 at our Investor Day. And quite frankly, we think the demand environment from our military and defensive customers looks much better for the next several years than they have in the last 5 years.

And we'll now go to Jamie Cook from Crédit Suisse.

This is Jamie Anderson, on for Jamie Cook. Just a quick question on FY '18, as we kind of look out. At the Analyst Day, I know you guys said that you could grow off the '17 base, ex-PEMEX, between 7% and 10%. I guess that would imply EPS between $1.14 and $1.39 or $1.26 at the midpoint, which is I guess slightly below the street. Is that kind of still the right way to think about EPS next year? And then I have a follow-up on execution.

We have no major change to our '18, the preliminary outlook at this time, from what we've shared in May. So we are proceeding to execute as we envisioned then. We'll learn a lot more about '18 in the next 6 months in terms of new contract wins, and perhaps, other developments. But right now, there would be no change to that thesis, and we'll keep you posted as we progress through Q3 and Q4.

Okay, great. And then I was wondering if you could just provide an update on the remaining lump sum legacy problem project, as well as the timing of recovery from the profit push out on Ichthys, and how much does those 2 projects are going to continue to kind of be operating cash flow headwinds because I guess the guide implies negative operating cash flow of negative $50 million in the back half of the year. It also looks like the unapproved change order position increased sequentially, somewhat, dramatically from $416 million to $570 million. So I was just curious what's driving that. And then, finally, you guys have this item on your cash flow statement, called reserve for loss on uncompleted contracts, which is, I guess, it's been a $35 million source of cash year-to-date. Could you guys give more color on that item if that relates to projects that are in a loss position where you've already seen the charges? Or does that kind of signal potential for future profitability impacts in the future?

That's a lot of questions in one question. So I'll start off with where we are on the lump sum. I mean, on excess itself, we're in the majority of what we're doing now is in the reimbursable component of the project. So the lump sum risk there is really associated with the subcontract with the power station that we're completing, which is just about 90% complete. And in terms of the other lump-sum EPC project, we've got one remaining in the U.S. I think we reported at Investor Day in last quarter that, that was progressing ahead of plan, and that continues to be the case. The execution performance on that is actually very pleasing indeed. In terms of the disclosures on approved changed orders that we've now sort of kind of looked across the company in terms of its unapproved change orders and vendor claims and subcontractor claims is for the whole of KBR. I think that a lot of that number is associated with Ichthys itself, and it's just the disclosure around the -- including there were subcontractor and vendor claims, as well as some unapproved change orders that have come up as we work that through with customers. In terms of the other piece on the $35 million, I'll let Mark answer that.

Yes, Jamie. So the operating cash flow, you have it right, relative to ballpark $50 million to the middle of the range of outflow in the second half. It's real simple. We expect cash earnings to be correlated to our EPS results in the second half, but we expect to have working capital uses that more than offset that for the rest of the year, as I think we've guided all year to pay for loss contracts that were accrued for in previous years, and for just the timing of working capital flows from EPC contracts that are nearing completion that are generally positive in the earlier stages and negative in the final stages, and negative cash flow in the second half has no correlation to our earnings per share estimates for the second half. So the disconnect is the working capital uses, which we've been very clear on all long. Relative to your question on the reserve for loss on uncompleted contracts, I'm looking at the cash flow for the quarter, and it was a use of $13 million, and that's exactly what I would suspect that we would be working that reserve down via cash payments to vendors, employees, as we complete those lost contracts, and you'll see more of that over the second half as we work through the completion of those projects.

And we'll now go to Alan Fleming from Citi.

Stuart, maybe you can talk a little bit more about the large project environment and kind of what you're seeing in terms of just several of these larger prospects that you've been looking at. And in the context of some recent oil volatility, how would you characterize the movement on final investment decisions on these projects? And have you seen any movement to the right or do you still feel relatively good that these projects are kind of tracking on schedule as you've thought?

Yes, I mean, good question. I think there’s been quite a bit of press recently from various sectors really sort of talking about the CapEx model changing a little bit within the IOCs and et cetera. But what -- I guess, what we're experiencing is that our project pipeline is now made up of multiple, what I would call, sort of, $500 million to $1.5 billion type range projects rather than the $20 billion megaprojects. And there's a number of those in our pipeline and they're across some of sort of mid-scale LNG. But more predominately, in the downstream arena, whether that's in polypropylene or at specialty chemicals, et cetera, so very, very much in the U.S. and a few sort of specialized pockets in Azerbaijan and the Middle East also. We've seen those projects progress as planned. I think the fact that the scale isn't so large, and I guess, the sort of stability of the gas market itself rather than the oil market is helping with that in terms of investment decisions. And we said all along that we felt that the backlog in E&C would be back end loaded this year and in sort of late Q4 into early 2018. We said that from the beginning of the year, and I think that's playing itself out. So the one, I guess, megaproject that we are chasing at the moment is the LNG project for Shell, which people are well aware of, and the investment decision associated with that will depend on the pricing that comes out of the EPC bidding exercise, but that's an outlier in some sense. I think the key for us is actually the multitude of opportunities and the sort of, I guess, the normative project range of $500 million to $1.5 billion.

Got it. That's helpful. And then maybe just a follow-up on some of these scope changes that you're seeing on Ichthys. So I guess maybe a little bit more color on what's driving these scope changes and how comfortable are you that, ultimately, this is more just a timing issue and that you will get paid by the customer and this won't result in eventual disagreement with the customer? How do you get comfortable with that and how can you help us get comfortable with that?

I think the first thing is the changes that we've sort of identified have been funded by the customer to date. The additional changes that we're sort of signaling, if you like, is already included in our EPS guidance to the best of our estimates are and the reimbursable portions. I think that's really just the environment in Australia that there's -- that people are -- it's -- productivity challenge there. It's the reimbursable element that the subcontractors are coming through with additional needs to complete the project. And as we work those through, it will be part of the reimbursable scope opposite the customer. So we feel very comfortable in that area. In terms of will there be an arm wrestle and a potential dispute down the line? I think there's -- in these big jobs, there's always a little bit of an arm wrestle at the end, but we're trying to keep a very commercial focus on -- with our partners. Where we’re heading and stay very aligned opposite the customer, and keep relationships and communications open at the end of the day. It's in everyone's interest to come out, what -- the conclusion of this, with a sensible outcome. And will it end up in court? Possibly. Possibly not. I mean, you can never guarantee one way or the other, but we'll work very hard to make sure there's an amicable resolution to this without commercial downside. I mean that's what our ultimate aim is.

One thing I'll add to that remark there, Alan, is we're trying to better clarify in our disclosure. When you read on approved change orders, you might construe that we are out that much cash. That's not the case. We, as Stuart has said, have negotiated a funding mechanism for the funding of a substantial portion of those unapproved change orders through the joint venture to fund those activities, whilst we work through the ultimate settlement of responsibility and so forth. So the cash flow situation is much better than what you might construe from just looking at that schedule. And we provide more clarity on that in the text that follows in the Ichthys JV footnote.

And we'll now go to Steven Fisher from UBS.

This is Cleve Rueckert, on for Steve. Most of my questions have been answered. But just a follow-up on the cash. Can you give us a sense of how much a drag the legacy projects are on free cash flow or cash from operations for the year in '17? And then when -- I don't know if you can give a firm estimate of when they all complete. I know that some of it is next year, but that would be helpful.

Sure. And I'll take you back to the Investor Day even before that. The answer has been the case all year. The drag, and I'll define that as the funding of lost contracts recognized in '16 that are well known, plus the timing of working capital from the late stage EPC projects, where you're net negative at the end, you're net positive at the beginning of the life cycle of those projects. Those 2 categories, collectively, would be a cash outflow of $300 million to $400 million, 2016 combined -- 2017, sorry, fiscal 2017 year end, $300 million to $400 million of working capital outflow for those 2 categories of things, offset by cash earnings, plus favorable items, like the PEMEX settlement. All of that flows into one yield, the cash flow guidance for the year of $120 million to $200 million.

So that hasn't changed? And then do you have a sense of when the legacy projects are going to be completed?

The lion share, I believe -- go ahead, sorry.

Yes, no, I was going to say the one remaining legacy project in the U.S., we're aiming for mechanical completion by Christmas time. And in terms of excess, I think I answered that earlier in the call. in terms of the first train before year-end and the second train by the middle of next year.

Okay. Yes, I just wanted to clarify that. And then I guess, Stuart, thinking more broadly, and I know this has been a topical discussion for a while, in terms of the 3% to 5% revenue growth next year, and then you talked about the breakout potential, how should we be thinking about that -- those revenue targets in terms --- and relative to backlog? I mean, do you need to see substantial backlog growth to achieve those numbers? Or is the market changing and developing in such a way that the smaller projects could be booked and burned and see, maybe, backlog burn accelerating going forward? I was just wondering how that context has changed.

Yes, I mean, it has changed quite a bit. I think we still want to see projects coming to fruition in late Q4, early 2018 to help us with that backlog story, and I guess, the E&C sector. But as I said in my, I guess, in the presentation, the -- I guess, the level, the sort of the quality of the foundation that sits within E&C in the reimbursable smaller project management, Engineering Services type contracts, as well as maintenance, gives us a far stronger foundation and less reliance on the sort of the major project backlog to predict our future. So I think it's a combination of both. I think we've derisked the future somewhat. But at the same time, we still like to see some bookings in late Q4, early '18, and the sort of downstream sort of specialty chemicals area I was talking about earlier.

And on the Government side Cleve, the cycle for funding has at least in our experience shortened. And so for example, the backlog on our largest project, LogCAP IV, is much less than 1 year's revenue, and it is funded more frequently in smaller bites, and so -- and that's funded through OCO primarily, and so its backlog is less correlated to future revenues than it used to be as a result of shorter funding cycles in government, at least, in our customers and so it's still an important forward leading indicator, but it's still quite possible to grow in a healthy manner. That backlog changes might not necessarily predict as well as it used to.

And we'll now go to Jerry Revich from Goldman Sachs.

This is Ben Burud, on for Jerry. So you guys had nice performance in Government Services in the quarter, and it looks like your organic growth for the legacy business in the segment is around 2%. Can you please talk about how you see organic growth shaping up over the next couple of quarters, given some of these wins you guys have already outlined?

The major new start for us would be Diego Garcia, assuming we prevail through the protest period, and so we expect -- assuming we prevail, that will start contributing more towards growth in the second half, probably more Q4 than Q3, if that proceeds as planned, plus whatever we win coming out of the large pipeline, both in aggregate, but also the outstanding bps. So we generally have guided to 5% of recurring annual revenue growth in the foreseeable period, coming out of our May 12 dialogue. So we're going to count on the pipeline growth that we have built and a strong win rate, and things like ongoing strength in our military overseas support to continue to grow the pace there.

And I think the book to bill of 1.3 in the quarter supports that.

Got it. And then turning to E&C, can you guys just give us an idea when you see some growth actually turning positive, based on the visibility you have in your backlog, especially with your comments about year-end?

Yes, I mean, I think, at our Investor Day, we sort of laid out how that plays itself out. If they award timing holds, which I think it will, and sort of you start to get these awards coming through at the end of the year and into '18. The first part of those projects is engineering, which is by the revenue ramp in '18 that we predicted was single-digit, and you get the engineering. And after several months of engineering, you get into the procurement and the construction cycles, which is where the majority of the spend is, and that's when you see the growth coming through in '19 at a much higher rate.

And we'll now go to Scott Scher from LMJ Capital.

Quick question on the balance sheet. I know, last year, you guys had talked about terming out some of the debt. Obviously, the charges in the third and fourth quarter, I think may have prevented that. Now you've had 2 profitable quarters, no charges and you're suggesting you don't see any significant charges on the horizon. So can you talk about your debt plans and terming that out and getting a longer term structure and putting in some permanent capital on the balance sheet, please?

Great, Scott. We still intend to refinance our revolver with longer-term debt, as you have summarized. And as we have said, based on our discussions with our advisors, we did feel, as you've also said, that getting a couple of quarters under our belt in our new model, if you will, and demonstrating the greater stability and predictability of our business would help us towards that end. We've also seen some market activity in the E&C space on the credit side that's been a little disruptive there and our performance. The more we can separate our performance from that, the better off we would be, and so I think we're in a much better place after the first half of the year to proceed, and that's still our short-term goal.

And there are no further questions. I'll turn the conference back over to you, Mr. Bradie, for any additional or closing remarks.

Thank you. I think, thank you, all, for taking the time. That's a strong quarter following on from original sort of good start to the year. And we’re feeling pretty good about our business for the second half of the year, obviously. Available for questions after this either myself, Mark or Nelson, so -- but thank you, again.

This concludes today's presentation. Thank you for your participation.