Jacobs Solutions Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2022

Key Takeaways

  • Jacobs reported Q4 net revenue up 6% year-over-year (11% constant currency) and backlog up 5% (8% CC), driven by broad‐based growth across all business lines.
  • The company is launching a new Divergent Solutions segment in Q1 FY’23, consolidating software and data capabilities into high-growth verticals (Transportation, Water, National Security) to accelerate margin expansion.
  • People & Places Solutions, led by the Advanced Facilities unit, saw operating profit grow >25% in FY’22, with strong demand in life sciences, EV charging, green energy and water technology driving an expanding pipeline.
  • Critical Missions Solutions operating profit fell 17% in Q4 (margin down 220 bps) due to a rate true-up and ramp of remediation work, although recent major wins in cyber, space (Artemis) and hypersonics support margin recovery.
  • For FY’23, Jacobs expects mid-single-digit revenue growth (high single digits CC), adjusted EBITDA of $1.40–$1.55 billion and EPS of $7.20–$7.90, depending on foreign exchange rates.
AI Generated. May Contain Errors.
Earnings Conference Call
Jacobs Solutions Q4 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs' Fiscal 4th Quarter and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. It is now my pleasure to turn today's call over to Mr. Jonathan Doros, Investor Relations. Sir, please go ahead.

Speaker 1

Thank you. Good morning to all. Earnings announcement and 10 ks were filed this morning. We have posted a copy of the slide presentation on our website, which you will reference during the call. I would like to refer you to Slide 2 of the presentation materials for information about forward looking statements and non GAAP financial measures.

Speaker 1

Now turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Steve Dimitria President and Chief Operating Officer, Bob Vergada to President and Chief Financial Officer, Kevin Berrien. Steve will begin by reviewing our Q4 results

Speaker 2

and then provide an overview

Speaker 1

of our software and technology platforms. Bob will then review our performance by line of business and Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with some closing remarks, and then we'll open up the call for your questions. In the appendix of this presentation, we provide additional ESG related information, including examples of our leading ESG solutions. With that, I'll now pass it over to Steve Demetria, Chair and CEO.

Speaker 3

Thank you for joining us today to discuss our Q4 fiscal year 2020 to Business Performance and 2023 Outlook. As I transition to Jacob's Executive Chair, I'm excited and confident about the next phase of our strategy boldly moving forward. This strategy continues to unlock and elevate our transformed high performance culture to capture significant growth opportunities we've identified across climate response, consulting advisory and data solutions, while benefiting from the recurring nature and diversity

Speaker 2

of our core businesses. From a

Speaker 3

financial standpoint, we believe the rigorous to the execution of this strategy will result in enhanced long term revenue growth and expansion in our profit margin profile. During our last two strategies, we maintained a focus on continuing to reshape our business through organic investments, acquisitions and divestitures. And by doing so, we were able to deliver value for all of our stakeholders, including our shareholders. Since we started our journey together in 20 to the company. We intentionally transformed our culture and our brand, grew revenue and expanded profit margins, leading to a total shareholder return of approximately 2 50%, almost twice the return of the S and P 500.

Speaker 3

We believe the next phase will be equally as transformative as we maintain our brand promise of challenging today and reinventing tomorrow. Let's now discuss our 4th quarter results. We're seeing strong demand with robust opportunities in our sales pipelines and a number of marquee recent wins, which to our strategy. During the quarter, net revenue grew 6% year over year and grew 11% on a constant currency basis, with another quarter of constant currency growth across each line of business. Backlog was up 5% from the prior year's quarter and 8% on a constant currency basis.

Speaker 3

Within People and Places Solutions, our Advanced Facilities business again posted double digit year over year top line and operating profit to the Q4 and the remaining PMPS units in constant currency also experienced year over year growth. During the current quarter, Critical Mission Solutions is beginning to see previously delayed opportunities enter the final stages with a major cyber win last week and with another win close to clearing the protest period. PA Consultancy and PA Consulting in constant currency continued to show strong Q4 growth with revenue up 9% and backlog up 8% year over year. PA successfully won a large multiyear contract with the Ministry of Defense to secure the next generation soldier in what's proving to be a digitally enabled battlefield. From a full year standpoint, we finished the year within our original guidance range even when recognizing The translation impact from the strengthening U.

Speaker 3

S. Dollar with double digit net revenue and operating profit growth on a constant currency basis. Turning to Slide 5. Let me discuss an element of our Data Solutions Accelerator that's housed within the Divergent Solutions business unit, which we will formally break out starting in our fiscal Q1 of 2023. We have consolidated the majority of our software and data solutions into a single unit to gain benefits from consistent product management, marketing and research and development.

Speaker 3

Our data solutions are aligned to 3 high growth verticals of Transportation, Water and National Security. A competitive differentiation of our vertical software platforms For example, our streetlight data platform is a SaaS solution that ingest a variety of mobility data sources into proprietary algorithms that provide data analytics for both traditional transportation clients and giga projects within the broader infrastructure market. Our GeoPod technology creates mapping data for multiple confidential customers as they plan for autonomous driving, precision agriculture in other aerial surveillance requirements. In Water, we continue to leverage smart algorithms developed by our domain experts to optimize our clients' operations and maintenance. Both Aqua DNA and our intelligent O and M solution to save 10% to 30% in energy use for wastewater treatment.

Speaker 3

We continue to expand our water solutions across our clients' assets lifecycle. From a national security standpoint, our ExtremeSearch solution has proprietary algorithms and compute ability that can rapidly search to large volumes of real time or log data. One critical use case is quickly finding indicators of compromise to prevent cyber breaches. Given the significant amount of data that will be created and utilized in IT and OT environments, we believe the applications of these type of solutions who are in the early stages of decades of robust growth. Before I turn the call over to Bob, First, I'd like to thank the amazing people at Jacobs for living our values and progressing our culture over the last several years.

Speaker 4

To the conference call. Every single day, Jacobs is providing critical solutions globally.

Speaker 3

For example, most recently supporting NASA for the Artemis launch to the moon for consulting on green hydrogen solutions for sovereign nations, delivering world scale biotechnology manufacturing solutions, remediating harmful PFAS chemicals from our water or planning autonomous transportation for the city of the future. It is truly our people that make Jacobs a company like no other. Now I'd like to congratulate Bob on his appointment to CEO and say that I'm excited we have an experienced and dynamic leader who brings decades of industry domain knowledge and a proven track record to lead our boldly moving forward strategy into the future. Bob? Thank you, Steve.

Speaker 2

I'm honored to take on the role of CEO early next year and advance the exciting work underway to further diversify our capabilities and offerings, to increasing opportunities and value for our people, our clients and our shareholders alike. I want to thank Steve for his partnership and guidance over the past 7 years. He is an incredible leader who inspires all around him and leaves a tremendous legacy at Jacobs. I'll begin on Slide 6, discussing our People and Places Solutions business, where we achieved strong top and bottom line results with backlog up 8% year over year and 12% in constant currency. To critical infrastructure priorities on the rise over the past year, our quarter results show that we've been successful in converting opportunities into accessible backlog.

Speaker 2

This success is underpinned by our global workforce, which expanded 12% this year. For example, in FY 2022, our Advanced Facilities unit operating profit grew by well over 25% on a constant currency basis due to our scalable multi geography delivery teams. Overall, we see our quarter results as Jacob's strategy in action. It's proof that Jacobs' deep domain expertise can transform client outcomes replacing conventional infrastructure delivery with modern data enabled solutions. I'll discuss results under the themes of supply chain diversification, infrastructure modernization and climate response.

Speaker 2

Across these themes, I'll highlight how our technology and data solutions enable our success. 1st, Supply chain diversification has led to expanded delivery for clients with long term investment profiles that continue through changing economic conditions. In life sciences. Our clients are in the middle of a generational expansion of therapeutics and vaccines as well as advanced healthcare and to attacking people on a global scale. Our confidential clients can accelerate production capacity for life saving medicines for the most widespread chronic diseases by leveraging Jacobs' expertise in digital design to optimize delivery across multiple large scale biotech campuses.

Speaker 2

We are also advising and delivering predictive analytics for point of care treatment, resulting in improved outcomes for a growing and aging population with clients such as New South Wales Health Infrastructure in Australia, Children's Hospital of Philadelphia and the Centres For Disease Control in the U. S. Jacobs remains uniquely positioned across the entire electric vehicle ecosystem to address all aspects of this rapidly expanding market, from manufacturing capacity to EV charging infrastructure to advanced mobility implementation. With favorable tailwinds, and expanding list of automobile and EV manufacturing clients are seeking Jacobs' leading support to develop sustainable production capacity. Moving to climate response.

Speaker 2

Global demand for affordable green energy led to an increase of over 33% in bookings with wins across multiple geographies, including the U. K. National Grid, U. S. Department of Energy, of Lenergy in Korea, where we're developing a new green hydrogen production and import facility.

Speaker 2

In the U. S, IIJA supported pipeline is building momentum and projects are moving through the sales cycle into delivery. For example, there is a broad focus on transportation decarbonization with support for the National Electric Vehicle Infrastructure Program, NEVI, across multiple DOTs, charging infrastructure for the Navy and in multiple states under the low or no emission vehicle grant programs. For the Environment Agency in the U. K, we are delivering a digital proof of concept, leveraging spatial predictive analytics to avoid extensive damage and human casualties due to flooding and other climate driven disasters.

Speaker 2

At the same time, National Highways chose us to streamline their complex data landscape, thanks to our cyber and digital capabilities, partnered with PA Consulting. With Streetlight Data's multimodal transportation insights platform, we've expanded opportunities for both traditional public sector transportation clients and new private sector clients to prioritize marketing and real estate investments. Water sector clients are investing in our new technologies such as to Aqua DNA, Dragonfly and Intelligent Operations and Maintenance. These integrated AI and MO cloud based technologies enable clients to provide reliable clean water access for all communities, leading to expanded services this quarter from wins in Puerto Rico, Florida, Louisiana, to the U. K, Singapore and Australia.

Speaker 2

These innovative platforms are driving new standard for asset management. In Hawaii, we are delivering a 20 year installation development plan to address climate adaptation for the Joint Base Pearl Harbor Hiccup. Under infrastructure modernization, mega program delivery trends continue as clients look for more efficient ways to deliver sustainable, livable places. In Scandinavia. We're designing the Nordhaven tunnel to cross the harbor in Copenhagen, Denmark.

Speaker 2

And in Toronto, Metrolinx recently awarded Jacobs a multiyear extension to support their $85,000,000,000 regional transit expansion. In summary, People and Plant Solutions is positioned for long term growth as evidenced by strong performance across all geographies and client segments. Clients are continuing to partner with Jacobs to deliver transformative infrastructure, advanced manufacturing expansion and energy security projects with to sustainable lasting outcomes. Moving to Slide 7 to review Critical Missions Solutions line of business. CMS delivered solid performance in the 4th quarter with backlog remaining strong at $10,600,000,000 flat year over year, on creating resilient revenue growth and margin expansion by offering technology enabled solutions aligned to critical national priorities.

Speaker 2

CMS' service and solutions offering are delivered across our core customer markets, space, cyber, intelligence, defense and energy. And we continue to see strong demand for our solutions across all of them. In space, Jacobs is a critical prime contractor to NASA's Artemis program, including being the key integrator of the successful uncrewed launch last week of the Space Launch System Rocket in preparation to send U. S. Astronauts back to the moon by 2025.

Speaker 2

The Artemis 1 launch is historic and we are proud of Jacob's role in the mission. Also, we were awarded contracts by the Scottish Rocket manufacturer and SmallSat Launch Service Provider, Orbex, to help them build and operate a vertical launch site for satellites in the U. K. Several trends in other Jacobs Key markets that we are seeing Contributing to our continued growth include 0 Trust Architecture, Hypersonics and Modular Reactors. Beginning with 0 Trust Architecture or ZPA.

Speaker 2

White House Executive Order 14,028 mandates to adoption of ZPA cybersecurity models across the federal government. Importantly, ZPA requires continuous verification of identity as movers as users move laterally through network systems. Jacob's Cyber Intelligence team, which is now part of our new divergent solution Operating Unit is the program manager for 1 of the intelligence community's largest directors responsible for identity, credential and access management, to ICAM. ICAM is a critical architectural component of effective 0 Trust models and Jacobs' technical leadership in this area positions us to help clients across the federal government meet the White House Executive Order. Our Cyber and Intelligence business unit has a significant pipeline of opportunities for Quine ZPA adoption.

Speaker 2

In Q4, our cyber and intelligence team also won several new non ZPA contracts, including an agile software development and sustainment contract or a classified contract and one assisting the Navy to advance their radar sensing capability at the Naval Research Laboratory. We also recently cleared the protest period for a $470,000,000 6 year IDIQ to providing identity intelligence support to the DoD, which is not yet reflected in backlog. Moving on to hypersonics. With advances in hypersonic missile technology by China and Russia, the U. S.

Speaker 2

Department of Defense is developing missile defenses to defend against hypersonic weapons and other emerging missile threats. Because hypersonic weapons fly at speeds of at least Mach 5, roughly 1 mile per second and can maneuver en route to their target, that are more difficult to defend against. Jacobs has decades of experience supporting the U. S. Air Force and NASA and has positioned itself as a leader in hypersonic solutions.

Speaker 2

In last quarter, Jacobs was awarded a 5 year $100,000,000 IDIQ to help the U. S. Navy design and operate an underwater launch to the Naval Surface Warfare Center. The contract also covers modernization, design, fabrication and operation support for an in air launch testing platform at the Naval Air Weapons Station, China Lake in California. To finally demand for modular reactors.

Speaker 2

Nuclear power is coming into favor as a clean energy alternative to fossil fuels. For countries to achieve their net zero carbon emission goals and ensure energy independence and security, leaders are realizing they need to include the always on to emission free generation. Small modular reactors or SMRs are reactors with electric generating capacity of 300 megawatts versus traditional large reactors with generating capacity of 1 gigawatt or more. SMRs have numerous benefits including lower initial capital investment, greater scalability through factory manufacturing processes, greater siding flexibility on smaller grids and isolated areas and greater energy efficiency. In the U.

Speaker 2

K, we are delivering engineering and technical services to the Rolls Royce SMR program and licensing advice to GE Hitachi Nuclear Energy as they look to enter the U. K. Market. There's also increased interest in new advanced to modular reactors or AMRs that can be designed to provide specific benefits such as producing high heat or green hydrogen production. We are supporting multiple AMR vendors in the U.

Speaker 2

S. And U. K. Jacobs is a leader in global nuclear solutions, building on our long legacy of organic capabilities and acquisitions of CH2M and Wood Nuclear. In summary, we continue to see solid revenue to our solutions in FY2023 with approximately 85% of CMS' portfolio consisting of large enterprise contracts with durations greater than 4 years and 88% from federal level government funding.

Speaker 2

We are also pleased with the Government to the Accountability Office's recent guidance to have the U. S. Air Force reevaluate proposals for its large integrated support contract, to ISC 2.0 in support of a new source selection decision. And therefore, this remains in our pipeline as a potential multibillion dollar opportunity. The CMS sales pipeline remains robust with the next 24 month qualified new business at approximately $30,000,000,000 including $10,000,000,000 in source selection with an expanding margin profile.

Speaker 2

Moving on to PA Consulting on Slide 8. PA continues to deliver its strategy and is securing exciting and enduring work. PA's deep client insight, lasting relationships and ability to to clients through economic cycles is also generating consistent demand for its expertise. This quarter, PA was awarded marquee wins across its key markets. As Steve mentioned, in the U.

Speaker 2

K. Public sector, where it's a major player, PA was selected as the lead systems integrator for Kraniak, a multiyear contract providing next generation solutions to counter threats posed by Radio Controlled Improvised Explosive Devices, IDDs. The contract leverages PA's extensive experience in major program delivery as they lead the delivery consortium, TeamProtect. PA was also appointed to oversee the delivery of a once in a generation program to social care reform in the U. K, further cementing its position in government and public sector.

Speaker 2

Transport continues to be a major focus with additional awards to 1 at Schiphol Airport in the Netherlands, where the joint capabilities of Jacobs and PA continue to create further opportunities to include Boardroom Advisory and Digitalization of Airside Operations. The Jacobs PA partnership is strongly positioned to continue to capitalize on substantial market opportunities. Jacob's global footprint and broad based domain expertise together with PA's high end digital consulting creates a compelling value proposition in distinct areas of opportunity. Now I'll turn the call over to Kevin to review our financial results in further detail.

Speaker 4

Thank you, Bob. And turning to Slide 9 for a financial overview of our 4th quarter results. 4th quarter gross revenue Grew 8% year over year and net revenue 6% and up 11% year over year on a constant currency basis. All lines of businesses grew 4th quarter revenues over 9% versus year ago in constant currency. Adjusted gross margin in the quarter as a percentage of net revenue was 26% and improved slightly from the 3rd quarter, but was approximately down 130 basis points year over year, primarily driven by 1, our CMS line of business due to the newly ramped remediation contract and to investments in incremental employees and PA in advance of the large wins such as the U.

Speaker 4

K. MOD award that will ramp over the coming months. We expect gross margins to modestly improve from Q4 levels during fiscal 2023, driven by recent wins in cyber, to favorable revenue mix, the recent wins in PA Consulting and continued strong performance in our People and Places Solutions business. Adjusted G and A as a percentage of net revenue was 15.2%, down 40 basis points from Q3 and down 200 basis points year over year. During the quarter, we benefited from lower labor expenses as we managed our cost structure.

Speaker 4

We are targeting G and A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $309,000,000 and was mainly impacted by $52,000,000 of amortization from acquired intangibles and other acquisition deal related costs and restructuring efforts of $14,000,000 with over half associated with integration costs of acquisitions and finally a positive benefit from 3rd party recoveries of $27,000,000 pre tax, which we excluded from our adjusted results. Adjusted operating profit was therefore $347,000,000 up 15% year over year. And on a constant currency basis, it was up 19% year over year. Our adjusted operating profit to net revenue was 10.7%, up 80 basis points year over year.

Speaker 4

I'll discuss the moving parts later when reviewing the line of business performance. GAAP EPS from continuing operations was $1.75 per share and included a $0.16 benefit from the 3rd party recovery receivable, a $0.12 benefit to align to our effective adjusted tax rate, offset by a $0.27 impact related to the amortization charge of acquired intangibles and since $0.06 from transaction, restructuring and other related costs. Excluding these items, 3rd quarter adjusted EPS was $1.80 up 14% year over year and up 18% in constant currency. Jacob's consolidated Q4 adjusted EBITDA was $350,000,000 and was up 13% year over year, representing 10.8% of net revenue. On a constant currency basis, adjusted EBITDA was up 17% year over year.

Speaker 4

Finally, backlog was up 5% year over year and 8% on a constant currency basis. Sequentially, Backlog was impacted by the strengthening U. S. Dollar at year end compared to the end of the third quarter. As an example, The dollar strengthened 8% versus the pound sterling from the end of Q3 to the end of Q4.

Speaker 4

As a result, On a constant currency basis, backlog was flat sequentially. The revenue book to bill ratio was 0.94 times with our gross margin to bill at 1.05 times given the higher margin profile within backlog on both a year over year and sequential basis. Our book to bill ratios continue to be impacted by the burn of the approaching Kennedy NASA rebid as backlog continues to fall until which time the rebid is awarded. Now moving to Slide 10 for a brief recap of our full year to the Q2 performance. Final year gross revenue grew 6% year over year and net revenue grew 10% in constant currency.

Speaker 4

On a reported basis, we expect fiscal 2023 revenue growth in the mid single digits and high single digits on a constant currency basis. GAAP operating profit was $918,000,000 up significantly year over year driven by a material decrease in one time items related to to the Q1 of 2019 as well as solid underlying constant currency growth in the business. GAAP EPS was $4.98 and adjusted EPS was $6.93 up 10% year over year and up 13% on a constant currency basis. Adjusted operating profit grew 10.6% and was up 13% on a constant currency basis. Operating profit margins expanded nearly 30 basis points to 10.4%, driven by revenue mix benefits and lower support costs.

Speaker 4

Adjusted EBITDA was $1,360,000,000 up 10% and up 12% in constant currency. As a percentage of net revenue, adjusted EBITDA was 10.8%, up 20 basis points from fiscal 2021. We expect modest adjusted operating profit margin expansion in fiscal 2023, driven by a combination of a higher margin revenue mix and lower employee related costs. However, adjusted EBITDA margins are expected to be flat year over year as other income who will be burdened primarily by unfavorable pension costs driven by the higher interest rate environment. On a trailing 12 month basis, book to bill was 0.97 times and gross margin book to bill was over 1 at 1.05.

Speaker 4

Regarding our LOB performance, let's turn to Slide 11 for Q4 performance and Slide 12 for full year performance. Starting with CMS. Q4 revenue was up 10% year over year and up 12% in constant currency. Blacklinx contributed approximately $22,000,000 to the 4th quarter revenue. Fiscal 2020 revenue on a reported to the Q1 of 2019.

Speaker 4

Currency basis grew 3% as the part of the year as the first part of the year did not benefit from the ramp of the Idaho nuclear remediation win. Blacklinx contributed $50,000,000 in revenue for fiscal year 2022. For fiscal year 2023, We expect revenue growth in the mid single digits for the CMS business and higher double digit growth in our Divergent Solutions Unit. Q4 CMS operating profit was $95,000,000 down 17% year over year and down 14% on a constant currency basis. Operating profit margins as a result were down 220 basis points year over year to 6.9%.

Speaker 4

Consistent with our previous outlook, Q4 operating profit and operating margin percentage were impacted by a rate true up in our Cyber and Intelligence business. To the rate true up was related to higher G and A costs over the course of the year, given the slower ramp in the business during the continuing resolution. Looking forward, we have successfully been awarded a large new classified cyber win that was previously delayed during the continuing resolution, indicating developing momentum. Looking into fiscal 2023, we expect approximately 75 basis points of sequential operating margin expansion in Q1, driven by immediate rebound from the one time rate true up in Q4. We're also targeting further margin expansion through fiscal 2023 as we win and ramp new higher margin awards.

Speaker 4

Moving to People in Place's solutions. Overall, PMPS delivered strong revenue and operating profit results. Q4 net revenue was up 6% year over year and up 10% in constant currency. On a constant currency basis, each TMPS region demonstrated net revenue growth and for the full year, TMPS grew 4% on a reported basis and 7% in constant currency. Looking deeper into our business units, our Advanced Facilities unit, which benefits from investments in the life sciences, semiconductor and EV supply chains, posted another to a stellar quarter of double digit revenue and operating profit growth.

Speaker 4

For the fiscal year, the business grew operating profit well north of 25%. We expect our advanced facilities growth rate to continue to remain robust during the fiscal year 2023 at approximately 10%, despite the strong year over year comparisons. The PMPS International Business Q4 revenue and operating profit was essentially flat year over year on a reported basis, but grew double digits in constant currency. For the full year, international operating profit was up 10% year over year in constant currency. Our international business but is poised for full year growth on a constant currency basis.

Speaker 4

Total PMPS Q4 gross profit and margins were up year over year with Q4 operating profit up 31% and operating profit as a percentage of net revenue up 2.75 basis driven by revenue growth and mix as well as lower label costs during the quarter. Full year People in Places operating profit was up 5.5 on a reported basis and up 10% in constant currency with operating margins of 13.2%, up 20 basis points versus year ago. In terms of PA's performance, PA Q4 revenue declined 7.7% year over year in U. S. Dollars, to the company's earnings call.

Speaker 4

Q4 adjusted operating profit margin was 19.4% during the quarter due to continued lower utilization and investments in pipeline pursuits. As Bob mentioned, PA Consulting has been successful winning the large credit award with the MOD for which we expect to show benefit later in 2023. To continue to target double digit revenue growth on a constant currency basis with operating margins returning to above 20% throughout 2023 driven by improved utilization. Our non allocated corporate costs were $28,000,000 down year over year as we benefited from lower incentive costs and to a lesser extent from a positive currency impact on our supported costs and other benefits. We now expect non allocated costs corporate costs to be $190,000,000 to $210,000,000 for fiscal 2023, which is slightly higher than fiscal year 2022 as we expect higher incentives costs on a year over year basis.

Speaker 4

Now turning to slide 13 to discuss our cash flow and balance sheet. Cash flow generation continued to be strong. Free cash flow was $230,000,000 in Q4 and included $12,000,000 related to transaction costs and other items. On a full year basis reported cash flow was $347,000,000 that included the net $475,000,000 of cash outflows related to the previously announced MPEX settlement, the first $55,000,000 repayment of a CARES Act payroll tax deferral in a net $4,000,000 cash benefit related to other items. Excluding these items, free cash flow conversion to adjusted net income was 97% for the year.

Speaker 4

For fiscal 2023, we expect 2 items to impact cash flow and approximately net $15,000,000 to further cash outflows from restructuring, transaction and other related costs and a final repayment of $60,000,000 of CARES Act payroll to tax deferral benefits. Excluding these items, we anticipate again to achieve 100% free cash flow to adjusted net earnings in fiscal 2023. We are also continuing to evaluate further real estate opportunities, giving our developing insight as to our longer term needs given the hybrid work environment, and we will update on our Q1 earnings call with further developments in this regard. During the quarter, we repurchased approximately $31,000,000 of shares and for the full year, we repurchased $282,000,000 After September, we have continued to be actively purchasing shares with approximately $135,000,000 repurchased as of last week. As we have said before, we will remain agile and opportunistic in repurchasing shares as we see disruption in the market.

Speaker 4

We ended the quarter with cash of $1,100,000,000 and gross debt of $3,400,000,000 resulting in a $2,300,000,000 of net to our Q4 net debt to 2023 expected adjusted EBITDA of approximately 1.6 times is a clear indication of the continued strength of our balance sheet. As of the end of Q4, approximately 60% of our debt is tied to floating rate debt. And as a result, we are expecting incremental interest costs going forward, which we have incorporated into our outlook. As of the end of the Q4, our weighted average interest rate was approximately 3.6%. Early in Q4, we entered into a notional $500,000,000 interest rate lock at a rate of 2.7% as related to a planned future fixed rate issuance.

Speaker 4

The mark to market benefit from the in the money interest rate lock is currently recognized to other comprehensive income, but will offset interest expense of our future expected fixed income issuance. Also in early October, we redeemed $481,000,000 of private notes at par. In the appendix on Slide 16 of this presentation, we included additional detail related to our debt maturities, to interest rate derivatives and quarterly interest expense. Finally, given our strong balance sheet and free cash flow, We remain committed to our quarterly dividend, which we announced at the end of the Q4 of fiscal 2022 and paid on October 28. I will now turn the call back over to Bob.

Speaker 2

Thank you, Kevin. Turning to Slide 14. As we discussed throughout our remarks, through proactive portfolio management, we have aligned our business to sectors that can demonstrate robust to growth through multiple economic scenarios. We continue to enhance our overall growth rate with our climate response consulting and advisory and data solutions strategic to the Q1 of 2018. Given the volatility of FX rates, we are providing our outlook under 2 FX scenarios.

Speaker 2

1, an outlook based on constant currency, which provides greater insight of underlying business performance and 2, an outlook based on more recent FX rates. Although we transact in multiple currencies, one example for reference is the pound sterling. The fiscal year 20 to the Q2 average conversion rate for the pound sterling was $1.28 compared to $1.15 in early November 2022. As Foot noted in our earnings release and investor presentation, based on fiscal 2022 average rates, Our outlook for fiscal 2023 adjusted EBITDA is $1,465,000,000 to 1,545,000,000 to an adjusted EPS of $7.60 to $7.90 up 10% and 12% respectively at the midpoint. Based on rates in early November, our outlook for fiscal 2023 adjusted EBITDA is $1,400,000,000 to $1,480,000,000 and adjusted EPS of $7.20 to $7.50 both up 6% at the midpoint.

Speaker 2

On a net revenue basis, the difference between these two scenarios is approximately 430,000,000 Looking beyond fiscal 2023, we remain confident in achieving double digit constant currency adjusted EBITDA growth consistent with our strategic plan. Operator, we will now open the call for questions.

Operator

Your first question comes from the line of Burt Subin with Stifel. Your line is

Speaker 5

open. Hey, good morning and congratulations both Bob and Steve.

Speaker 1

Thanks Bert.

Speaker 5

Bob, maybe to start out with you. You ended there talking about feeling pretty confident in sort of double digit growth. You guys have previously provided your fiscal 2024 targets by segment on both a margin and a sales basis. If we exclude the impact of FX, do you still remain confident in those bands across each segment?

Speaker 2

We do, Bert. The tailwinds that we see in the markets that we're serving, we stand by those commitments that we made on the 24 in the 'twenty four strategic line.

Speaker 5

Okay. And just a quick follow-up in terms of thinking about PMPS. It performed really well during the quarter, and you made some pretty positive comments on what you're seeing on the Advanced Facilities side. Do we expect any sort of incremental softness just as your semiconductor clients slow their CapEx spend? And in terms of the infrastructure side of things in the segment, are you starting to see a material uptick from IIJA?

Speaker 5

Or is that just the to the next question.

Speaker 2

Sure. So let me answer the first question. On the semiconductor spend. The industry as a whole from a demand standpoint is in a bit of soft period. The client base and the geographies that we're working in, we have not seen that.

Speaker 2

And so the front end work, the design work, The momentum that we've seen over the course of the last 6 to 8 quarters, that has not slowed at all. And We're feeling comfortable about where we sit in that ecosystem of consultants to that industry, specifically with our client base. So we're positive on that front. On IJA, we actually we are seeing those projects that we have been tracking through the development of both grants as well as Formula funding coming to fruition. Probably the bigger element to that is that the release of those monies is actually unlocking to the base funding that the states previously, specifically during COVID, had locked up not knowing kind of what the future looks like.

Speaker 2

So overall, the pipeline is up on the U. S. Basis in infrastructure. Our pipeline is up 4% to 5% I'm sorry, 5% without IHA, it's 18% with IHA from a pipeline standpoint. So we are seeing that.

Operator

Your next question is from the line of Louie DiPalma with William Blair. Your line is open.

Speaker 6

Good morning, Steve, Bob, Kevin and Kennen. I would like to echo congrats to Steve and Bob on your new role.

Speaker 3

Thank you.

Speaker 2

Thanks, Lloyd.

Speaker 6

For Steve and Bob, you referenced several Cyber Intel awards associated with your KeyW and Buffalo Group acquisitions. Are these awards margin accretive and should the critical mission operating profit in 2023 be back to the 2021 level?

Speaker 2

So both questions, Louis, the answer is yes. The 2 awards that Steve and I specifically spoke about are coming in through those 2 Aetna portals or through those relationships that we had in the acquisitions that we made during that period. So we are seeing that they are margin accretive. To the flip side of this is that these are awards that we had expected in previous quarters. And we talked about it a lot in previous earnings calls that the knock on effect of the CR has now had an effect on kind of when those things start.

Speaker 2

So We do see margins going up, and these are serving as catalysts for that too.

Speaker 4

The other thing, Louis, though, 'twenty one was the high point. So I would say that the underlying business Returning, we had some other events in 2021 that accelerated the margin a little bit higher. We had some one off closeouts, which were pretty strong. But I think in 2023, the underlying is getting back up well into the 8s, I would say. So maybe not all the way back up to the I think we are at 9% in 2021, but we're going to get underlying to be quite consistent with 2021.

Operator

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

Speaker 7

open. Good morning, gentlemen.

Speaker 2

Good morning.

Speaker 4

Hi, Mike.

Speaker 7

Maybe for Bob or Kevin, you call out in your CMS the improved in the book to bill, but also the gross margin book to bill. Maybe you can talk a little bit about PP and S And PAC in a similar light, if you want to give out the actual numbers. And how much is as you look into timing of awards and ramp up And some of the utilization issues that you were fighting in 'twenty two, is that more of mid to later 'twenty three to show some much better, safer FX, better growth as we move towards the end of 'twenty three.

Speaker 4

I'm sorry, Mike. You're breaking up. I was having trouble Daniel, I apologize.

Speaker 7

So my wife says all the time. So first, Kevin, I'm just talking about like your book to bill. You talk about the CMS gross margin book to bill, maybe you could highlight in PT and S and PAC similar, just observations relative to what's in backlog, what do you anticipate in new orders and maybe the timing of those orders relative to your outlook for 2023.

Speaker 4

Yes. Okay. Got that. All right. Thanks, Mike.

Speaker 4

So look, People in Places continues to show good margin profile in backlog as well. So I think that's obviously a very critical part of our strategy when we think about delivering more value added solutions, the margin is it's got to come with it. So the backlog margin profile is better in people and places and also it's better in PA as well. And the dynamic of PA relative to the Q4 number really was to effectively the continued utilization. We had expected to get up to around 20%, 20%.

Speaker 4

We fell a little short of that, but it's continuing to improve and we would expect that we'll get back up to those more normalized levels that we saw over the course of 'twenty two early 'twenty two relative to the margin profile there.

Operator

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

Speaker 8

Hi, good morning and congrats Bob And congrats, Steve. I guess, first question, Over the long term, can you just talk to on CMS, can you talk to the strategic importance of CMS to the portfolio? And if Margins continue to sort of underperform. Would you consider sort of other options or do you see a path over time to get to, I think, the margin improvement targets that you laid out in the 2024 targets, like how long before we get there. And then my second question, Kevin, the cash flow generation that you're implying for 2023, It's quite strong and your balance sheet is in good shape.

Speaker 8

So just trying to understand how you're looking at how you're thinking about the M and A profile versus share repurchase? Thanks.

Speaker 2

Yes, I

Speaker 3

want to say something. Yes, it's Steve here, Jamie. So I can speak for both the Board and management around that question is, first of all, The whole strategy around divergent solutions was to break out the elements of CMS that are to highly consistent, especially with the data solution side of our 3 accelerators. And so, obviously, Yes, we're off and running on that. We're excited about that.

Speaker 3

That's where we're really going to see accelerated margin growth, especially with these recent cyber wins that we've talked about, but also across to the entire platform. And then when you get into the remaining CMS business, just as an example, Nuclear most recently has been surging with regard to becoming a clean energy transition solution. And as you know, we're a major player in nuclear, not just in the remediation side, but the new build side, especially in the new

Speaker 2

As far as

Speaker 3

fit, etcetera, long term as we've done in the past and I mentioned in my remarks, but we're very optimistic about the CMS business as we move into 2023.

Speaker 4

Jamie, about the cash flow, Yes, we feel continued strength in our cash flow is expected over the course of 2023 that provides us degrees of freedom to your point about how we will to deploy that additional capital that's available. So look, I think we continue to monitor The M and A front, I think we were very clear during our strategy as to where we would probably be focusing those ideas and thoughts relative to the 3 accelerators that we outlined in strategy, and we're continuing to monitor those opportunities. There are things out there that are being evaluated. Obviously, got to And so we'll see how that plays out. Of course, we also talked about during the prepared remarks the proactive stance that we've been taking on to share repurchases.

Speaker 4

And so we feel like we're well positioned to be able to act when appropriate relative to a potential strategic opportunity and or do share buybacks when there's market dislocation.

Operator

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

Speaker 9

Yes. Hi, good morning, everyone. And Steve and Bob, congratulations. Thanks,

Speaker 7

Jerry.

Speaker 9

Bauma, I'm wondering if you could just talk about your strategic priorities over the next 3 to 5 years just from a high level standpoint, anything that we should be keeping in mind?

Speaker 2

Yes, Jerry, obviously, something that we've been I've been thinking about a lot. Maybe a couple of precursor comments and then directly to the question. The precursor comment was and I Try to infer it, but say it almost explicitly. The way Steve has run the executive team and the company has been really very inclusive. And so when you look at our strategy, not only just the one that we released last March, but even in 2016 2019, that's a strategy that was developed by all of us as a team.

Speaker 2

So it's not me coming in with a new strategy, feel very, very bought in and Hi to the strategy that we have. So the first big area around our clients, The accelerators that we have are the national and global priorities that are driving the world. And so that's going to continue to drive our business as we come up with more technology enabled and client driven type solutions. The second is around investments in our people. Our people have delivered time and time again over decades.

Speaker 2

But if you look at the profile of our people, though our business is weighted towards the we have about a 50five-forty 5 U. S. Versus outside of the U. S. Profile of our people, really driven around that global delivery that we've touted for so long.

Speaker 2

And so those investments and continued driving around Inclusion and diversity and sourcing talent from all over the world is going to be really, really important. And the last piece I'd say is around resilience. Resilience in our business with regards to our systems and how we run the company, but also simplicity of our business. We've diversified the business, and we've tried to have direct access to our clients, to making that having simplicity in the forefront is really key as well. So kind of segregated in those 3 main areas.

Operator

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

Speaker 10

Thanks. Good morning. So we have about a month left on the current continuing resolution. So I'm curious what you've baked into the guidance for continuing resolution across your segments. And then I guess there's clearly a lot of crosscurrents in the global economy at the moment.

Speaker 10

What do you see as Any other big risks to your guidance and maybe what contingency plans you have in process to address those risks? Thank you.

Speaker 4

Maybe I'll make some comments first and then have my partners here, add any additional commentary to think appropriate. So look, I think we feel pretty good about to the continuing resolution, given the makeup of the Senate and the House and how that's going to be coming together. And we just had a really to a deep dive review from our government relations team feeling pretty good about how things are going to play out over the course of this quarter. So we don't believe that there is going to be a continuing resolution that extends well into 2023. We're hoping that, that will become resolved near the end of the calendar year.

Speaker 4

So I think that We're already starting to see regardless of that continuing resolution, some momentum building relative to what Bob alluded to is and I made some comments on in terms of the cyber and intelligence business starting to get unlocked relative to bids being awarded and whatnot. So we think that the combination of those two things are embedded into our guidance and I said we feel Pretty good about it actually.

Operator

Your next question is from the line of Andy Kaplowitz with Citigroup. Your line is

Speaker 11

open. Good morning, everyone. Steve and Bob, congratulations.

Speaker 2

Thanks, Andy.

Speaker 11

So you mentioned you're still targeting double digit constant currency revenue growth for PA Consulting, but I think constant currency growth in Q4 was in the high single digits. Does the recent large contract when you mentioned give you the visibility you need to be confident around constant currency double digit growth for FY 'twenty three despite U. K. Economic concerns? And does margin normalize higher quite significantly in PA's revenue ramps up toward that 23% goal that you've given us before?

Speaker 11

Should we

Speaker 4

So if you look at the ramp up of the year. Certainly, that large win is part of the equation, but it ends up kind of Building over the course of 2023, and so it's less of a direct impact in 2023. What we do believe and our view on the U. K. Is that we've, I guess, I would characterize us as being underwhelmed by the level of activity productive activity in the government, which has actually put some pressure in the short term relative to the U.

Speaker 4

K. But with the recent budget that was announced and some of the activity of our clients is starting to look much better. So we're feeling like longer term into 2023 that we're going to start to see some incremental momentum versus kind of what we've been seeing over the last, I'm going to call it 6 months. So we're feeling that things will start to improve. The other thing is that The backlog and the pipeline of PA, we're seeing no challenges associated with that.

Speaker 4

Seeing a little bit of the burn profile as mentioned just earlier relative to the I'm going to call it the unknown relative to to the U. K. Government, but we're starting to see that instance and that issue going away as we speak.

Speaker 2

Just to put some just to quantify Kevin's last comment, to the pipeline growth in PA alone this quarter was 52% year on year. So the pipeline continues to grow in the way we evaluate pipeline within the PA world since it's a pure play consultancy, our to projects, programs, engagements where we already actually have started a bit of them too. So those are promising as well as to the programs that were announced in the budget that Kevin referenced, those are the programs that PA and Jacobs are actually partnered on right now. So That's hence the bit of positivity there along with some realism of the last couple of months on what's gone down.

Operator

Your next question is from Sean Eastman with KeyBanc Capital Markets. Your line is open.

Speaker 1

Hi, guys. Thanks for

Speaker 12

taking my questions. I just wanted to confirm whether we should still anticipate to Divergent Solutions to be broken out as a new segment starting in the Q1. And perhaps in advance of that, just try to get a rough expectation as to what that business line is contributing to this initial fiscal 'twenty three outlook, maybe from an EBIT perspective.

Speaker 4

So the business is effectively operational right now, and we will be executing against the promise that we made relative to reporting that as a separate segment on the financials. So, Sean, we're on track to do that. So I think that what we'll we're going to provide additional color commentary because we're still working through all of the accounting mechanisms to make sure that our systems are reporting accurately and the controls are in place because it's pretty large change. But I will tell you that it will be one of the highest growth areas that we're expecting in the company for 20 to 'twenty three. And effectively, it will be a margin profile that will be growing substantially over time, a little bit lower in 2023 than what we expect at the exit rate.

Speaker 4

But At the end of the day, we'll provide a lot of details in Q1 relative to that.

Operator

Your next question comes from Chad Dillard with Bernstein. Your line is open.

Speaker 11

Hi, good morning guys.

Speaker 2

Good morning, Seth.

Speaker 11

Good morning. So I was hoping you guys could expand on to take the opportunities for increased wallet share on infrastructure work. Maybe you can weave in some of the recent to acquisitions and some of your expanded digital capabilities and just talk about just what sort of margin we should be kind of thinking about for these new projects.

Speaker 2

Sorry, Chad, you were a little broken up there. Can you repeat the question?

Speaker 11

Yes. So can you just expand on like what sort of incremental wallet share opportunities you have in your infrastructure business? And maybe weave into it some of the recent acquisitions that you've had in terms of your expanded digital capabilities.

Speaker 2

Okay. In infrastructure, does that catch that part?

Speaker 11

Correct.

Speaker 2

Yes, got it. Okay. Yes. In Infrastructure, the opportunities continue to grow. I'd say broadly driven mostly in the U.

Speaker 2

S, but we're seeing this in You talked about the international I'm sorry, Kevin talked about the international business, but heavily geared towards transportation and water with a growing profile around energy transition. And so those are kind of the 3 main areas. Environmental So we see those, I mean the pipeline growth I talked about before has been really, really strong. On the acquisitions, that's a business where Streetlight Data probably was the last the one that we did. It was smaller acquisition.

Speaker 2

And we are immediately seeing the fit that we had anticipated in the deal kind of thesis around Streetlight, all around that data enabled use of data in driving a different type of solution for our clients. They had clients before, predominantly the state DOTs in the U. S, but that's been expanded with our And then we're seeing private sector utilization too, as private sector firms have looked at the use of data in order to cite different investments that they're making from a capital project perspective. So very positive news on that front.

Operator

Your next question is from Michael Feniger with Bank of America. Your line is open.

Speaker 13

Hey, guys. Thanks for squeezing me in. I believe you're guiding 2023 growth mid single digit or high single digit on a constant currency basis. You're citing some really robust sectors, EVs, life sciences, reshoring, hydrogen, autonomous. So what isn't growing that fast in the portfolio?

Speaker 13

Does it just take longer? Is there momentum, the project dollars get going? Does organic growth profile to higher utilization, how should we kind of think about that as we move forward into 2024?

Speaker 4

Well, look, If you think about the high single digits in terms of constant currency growth, I think that's pretty strong, actually. And look, I think that the bottom line is, for example, Bob just quoted the pipeline growth in the United States of near 20% kind of growth in the pipeline. It just takes a while for that to kind of to get B1 and then start to build the burn associated with it. So you're relying on your clients as much as you are anything else to be able to execute against that. And they're sometimes not as quick as we are ready to execute.

Speaker 4

So look, I think It's a growing momentum, and I think we're being prudent assuming how that's going to build over the course of 2023.

Speaker 2

If I could add, Kevin, while we're adding on those in markets that do have a quicker burn profile. All 3 of us today talked about the growth in Advanced Facilities where that has been a catalyst for growth. So though the top line might be in those numbers that were quoted, I did think we did say on a constant currency basis, Our bottom line growth would be double digits. So I think that there's some real optimism in the portfolio.

Operator

Your next question is from the line of Gautam Khanna with Cowen. Your line is open.

Speaker 3

Hey, congrats, Steve and Bob.

Speaker 2

Thanks, Jeff.

Speaker 3

I wanted Just following up on some of the recent questions, can you frame recompete exposure in fiscal 'twenty three and maybe even opine on 24 at CMS and wherever you think it's noteworthy. Percentage of sales up

Speaker 14

to rebid or if there

Speaker 3

are any lumpy to individual contracts that are up and maybe the timing of those.

Speaker 2

Sure. I'd say that the recompete exposure in 23 is moderate to low. We it's predominantly in our CMS business and we've already Got some real positive indications of some of those larger ones that are, I'd say, there's only a couple. So I would not characterize that

Speaker 4

The only one that we've called out, the one at Kennedy, which is

Speaker 15

That's a big one, but we

Speaker 11

feel good about our position.

Speaker 2

Next question, operator.

Operator

Your next question is from the line of Andy Wittmann with Baird. Your line is open.

Speaker 14

Great. Good morning. And Bob, Congratulations on your promotion, Steve, yours as well. Kevin, I just thought maybe a question for you. I wanted to understand The 4th quarter results here are a little bit clear.

Speaker 14

I guess your corporate unallocated expenses $28,000,000 I think you were kind of suggesting it was going to be higher than that for the quarter as well as your guidance for 2023 is implying a run rate of about $50,000,000 So I was wondering, I guess you called out incentive comp. You also mentioned an FX impact, keeping that number down this quarter. So could you comment on the size of the FX impact? And was that what the nature of that was? Was that like a non cash accounting saying for some hedge that you had in FX or was there something else in there that was driving that benefit to the quarter?

Speaker 4

No, look, the dynamic, I don't have the FX dynamic specifically outlined, but certainly can follow-up with you, Andy, on that. But if you think about it, our corporate related costs that support costs are embedded around the world. And so effectively, if you have U. K, for example, corporate related costs, they're getting translated into a lower rate effectively, so the value of those costs go down. And that effectively who had some benefits associated with us because it's all it's effectively corporate costs and not corporate revenue.

Speaker 4

So if you get the difference between the 2. And then look, we have known that The constant currency dynamic was still robust, but we knew that the reported currency continued to be a challenge, and we are very proactive in terms of taking steps to ensure that we reach the commitment levels that we had established for the company. We pay attention to this and very, very proactive in terms of the management of our cost structure during Q4.

Operator

Your final question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open.

Speaker 15

Great. Thanks and good morning. Just I guess the earlier commentary around how much the pipeline is building up including the IIJA. Kind of if we think about that bill and the other one starting to flow through, maybe some offset with pricing maybe moderating. How do you expect, I guess, backlog just to trend over the course of next 12 to 18 months.

Speaker 15

I guess it's fair to assume with that extra government funding, it could continue to grow? Just want to understand what you have embedded in the guidance that you've provided today.

Speaker 4

Well, I will tell you that, as you may know, backlog is one of our incentive to Metrix, and I can assure you that our incentives are based on backlog continuing to show very strong growth year over year.

Speaker 2

Could you guys just add one more thing just on what drives backlog, which is sales? Devak, we've put a tremendous amount. We've been a sales driven company for since inception. I think Doctor. Jacobs probably started that mantra.

Speaker 2

Our sales driven growth and the investments we've made, naming now our new Chief Growth Officer as well, It's been very, very specific as our portfolio has developed over the most recent period of time. We're putting the full force effort on our sales effort as the pipeline continues to grow, so timing is good.

Operator

There are no further questions. I will now turn the call back to Mr. Bob Preggada.

Speaker 2

Yes, thank you. Thank you everyone for joining our earnings call. I'm looking forward to providing further updates on our progress and upcoming events and calls. Have a for those of you in the U. S, have a wonderful Thanksgiving.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.

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