Jacobs Solutions Inc (J) — Q4 2021 Earnings Call Transcript

Thank you. Good morning to all. Our earnings announcement and 10-K were filed this morning. And we have posted a copy of the slide presentation on our website, which we will reference during the call. During the presentation, we will be making forward-looking statements, including the anticipated timing of the impact of the recently signed U.S. Infrastructure Bill, benefits of our strategic investments in PA Consulting and our financial outlook, among others. I would like to refer you to our forward-looking statements disclaimer, which is included on slide two regarding these and other forward-looking statements. During this presentation, we will be referring to certain non-GAAP financial measures. Please refer to slide two of the presentation for more information on these figures. In addition, during the presentation, we will discuss comparisons of current results to prior periods on a pro forma basis. See slide two for more information on the calculation of these pro forma measures. For pro forma comparisons current and prior periods include the results of recent acquisition and the PA Consulting investment. We are also providing pro forma net revenue comparisons, which also exclude the impact of the extra week in Q4 fiscal 2020. Turning to the agenda on slide three. Speaking on today’s call will be Jacobs’ Chair and CEO, Steve Demetriou; President and Chief Operating Officer, Bob Pragada; and President and Chief Financial Officer, Kevin Berryman. Steve will begin by updating the progress we are making against our strategy and the future of ESG at Jacobs. Bob will then review our performance by line of business. Kevin will provide a more in-depth discussion of our financial results, followed by an update on our Focus 2023 and M&A initiatives, as well as a review of our balance sheet and cash flow. Finally, Steve will provide the detail on our updated outlook along with some closing remarks and then we will open the call up for your questions. In the appendix of this presentation, we provided additional ESG-related information including examples of our leading ESG solutions. With that, I will now pass it over to Steve Demetriou, Chair and CEO.

Thank you for joining us today to discuss our fourth quarter and fiscal year 2021 business performance and key initiatives. Turning to slide four, before I review our results, I’d like to share that we are in the final stages of completing our new strategy. We will be hosting an investor event the week of March 7th for a deep dive of the next phase of our Jacobs’ transformation. Three key initiatives have emerged. First, we are putting in place a purpose-driven roadmap rooted in our values and strong culture to maximize our next stage of growth. Secondly, we identified and have aligned investment resources to capture three multi-decade growth opportunities, global infrastructure modernization, climate response and the digitization of industry. And third, we are taking a transformational approach to executing against these opportunities as we are unlocking the innovation engine at Jacobs, expanding our technology ecosystem, while accelerating our trajectory of profitable growth and durable cash flow generation. We look forward to illuminating the strategy at our upcoming investor event. Now turning to our financial results, I am pleased with our strong fourth quarter and fiscal year performance, with net revenue increasing 7% year-over-year. Adjusted EBITDA grew 12% during the quarter and 18% for the full year. Backlog ended the fourth quarter up 12% year-over-year and up 7% on a pro forma basis. PA Consulting continued to post exceptional performance with 41% revenue growth. More importantly, PA delivered this growth while maintaining adjusted operating profit margins of 24%. For the full year, PA revenue surpassed $1 billion, far exceeding our deal investment model. As we look at overall Jacobs growth going forward, we now have certainty surrounding the unprecedented U.S. infrastructure funding with the passage of the $1.2 trillion Infrastructure and Jobs Act last week. More broadly, global infrastructure modernization and national security needs are accelerating as our government and commercial clients address the challenges of climate change, advancement of their digitization strategies and increasing cyber threats. On top of that, our advanced facilities business is expected to show significant growth, driven by the need for additional semiconductor manufacturing capacity and post-pandemic life sciences priorities. Given these strong growth dynamics, we are introducing fiscal 2022 guidance for double-digit adjusted EBITDA growth. Looking beyond 2022, we expect our strong organic growth to result in approximately $10 per share of adjusted EPS in fiscal year 2025. Turning to slide five, as we reflect on climate change, it is globally accepted that humanity is at a critical juncture in our efforts to limit global warming. Jacobs and PA participated at the recent UN Climate Change Conference of the Parties COP26 in Glasgow to demonstrate our commitment to reinvent tomorrow with immediate and sustained action in the transition to a net zero economy. We stood alongside other business, financial and government leaders, as well as activists and students to make sure our voice was heard. We engaged in activities to accelerate solutions to ensure the world stays on track to meet the critical 1.5 degree Celsius trajectory while preparing to adapt to the changes already locked in from climate change. As we move to slide six, given the nature of our business, it’s clear that Jacobs’ greatest opportunity to positively address climate change comes from sustainable and resilient solutions that we co-create and deliver in partnership with our clients. To spearhead this effort, we have established a new Office of Global Climate Response on ESG to ensure that sustainability is woven into all of our solutions across markets and geographies. We are accelerating our established partnerships with the public and private sector to advance net zero carbon outcomes, climate resilience, natural and social capital, as well as ESG business transformation and alignment with the United Nations Sustainable Development Goals. Annually, we generate approximately $5 billion of ESG-related revenue and expect to grow significantly over the next several years, driven by strong capability in energy transition, decarbonization, climate adaptation and natural resource stewardship. Our culture is a competitive differentiator. Our people have the knowledge, curiosity and the trust of our clients to achieve our purpose to create a more connected sustainable world. With that, I will turn the call over to Bob Pragada to provide more detail by line of business.

Thank you, Steve. Moving on to slide seven to discuss Critical Mission Solutions. In the fourth quarter, our CMS business maintained strong performance with a 16% year-over-year increase in total CMS backlog, reaching $10.6 billion, which is a 7% rise on a pro forma basis. This growth is driven by strategic wins in cyber, intelligence, nuclear, and remediation. Our CMS strategy aims to enhance recurring revenue growth and margin expansion through technology-enabled solutions that align with critical national priorities. Three key market trends poised for growth are cyber threats, commercial space, and 5G technology for national security. In cybersecurity and intelligence, we observe several significant threats to national security: cyber attacks on crucial infrastructure that are stealthy and destructive, the escalating complexity of near-peer threats demanding real-time coordination across various domains, and the surge in data-intensive AI applications increasing the need for real-time data security. The funding to tackle these issues is reflected in the federal government's unclassified cyber spending, projected to exceed $20 billion in FY 2022, up by 10% from the previous year, with classified budgets expected to increase even more. Recently, we received a $300 million, seven-year contract with the National Geospatial Intelligence Agency to enhance NGA’s capabilities in rapidly acquiring and sharing insights from diverse imagery, including top-secret data. Additionally, we secured a $170 million, five-year contract to develop secure software applications leveraging the latest AI and machine learning advancements. The acquisition of BlackLynx provides software-driven solutions for data collection and analysis. Our strong footprint in the DoD and intelligence community, bolstered by our Digital Enablement Center, will help BlackLynx grow and scale profitably. We also established a strategic investment and distribution agreement with HawkEye 360 to enrich our digital intelligence technology offerings with their RF spectrum analytics and collection automation solutions. In the realm of space, as commercial space ventures attract considerable investment, opportunities like affordable space tourism, satellite technology acceleration, and the need for space debris management are expanding. We support commercial space firms through manufacturing optimization, prototype development, and testing studies. During this quarter, we learned that the ceiling raised on our contract with the Marshall Space Flight Center will support Artemis and SLS. The U.S. Space Force selected Jacobs for a five-year contract for system support in managing U.S. Space Force aircraft scheduling and training via the Patriot Excalibur System. Our telecom division also performed well, as clients like AT&T, Verizon, and T-Mobile ramp up 5G investments in 2022 and beyond. The new infrastructure bill allocates $2.5 billion for 5G implementation in U.S. military bases, indicating strong Department of Defense investment in 5G technology. Overall, we anticipate strong demand for our solutions throughout 2022. The CMS sales pipeline remains healthy, with qualified business opportunities exceeding $30 billion in the next 18 months, including $10 billion in source selection with improving margins. Now on to slide eight, I will touch on our People & Places Solutions business. We concluded the year with solid financial performance, achieving a 7% backlog growth year-over-year along with annual revenue increases. I will address our results related to climate response, pandemic solutions, infrastructure modernization, and digitization. In climate response, as a leading global environmental consulting firm, Jacobs is at the forefront of efforts to mitigate climate change impacts, support the transition to a net-zero economy, and respond to natural disasters. This quarter, we secured a multi-year contract with the U.S. Army Engineer Research and Development Center to implement nature-based solutions that enhance climate resilience across Defense Department facilities. We have been chosen to revitalize New York’s Rikers Island through a comprehensive community redevelopment plan that focuses on resilience and equity, involving innovative social value analysis. This effort is the first phase of a 20-year project consolidating aging wastewater facilities into a new, state-of-the-art recovery facility capable of processing one billion gallons per day with a renewable energy hub. In transportation, we are leading advancements in charging technology to facilitate clients' transitions toward greener operations, a key target of economic stimulus initiatives. Our transit team continues to secure contracts supporting the shift of assets and technology towards sustainable fleets, including a hydrogen rail feasibility study with Caltrans and ongoing partnerships with Brisbane Metro to enhance green transit solutions. With substantial growth anticipated in the electric vehicle market, we have doubled our EV project portfolio over the past year and expect ongoing expansion. We also announced a strategic partnership with Microgrid Labs, a provider of electrification and infrastructure solutions and a pioneering SaaS platform. Increasing investments in hydrogen and renewables are catalyzing diverse solutions for various clients, exemplified by our involvement in the Bacton Energy Hub consortium in the U.K., energy transmission projects for offshore wind development in the U.S., and partnerships with renewable facilities in Australia. Regarding pandemic response, we are gaining traction with multi-year backlogs across sectors, including new biopharma contracts, highlighted by a $2 billion biotechnology facility project. Jacobs has been awarded several health-related projects in the U.S., Europe, and Australia as organizations adapt to pandemic challenges. The ongoing global supply chain disruptions, particularly semiconductor shortages, position us well for growth in the electronics sector this year, expecting acceleration in our electronics business in the coming years. We are engaged in numerous significant projects for leading chip manufacturers, including designing Intel’s Arizona Fab, slated to become operational in 2024 as the largest private investment in Arizona’s history. The interconnections of climate initiatives, pandemic responses, infrastructure modernization, and digital transformation are creating opportunities for substantial growth in all sectors. We are continuously securing significant transportation projects across all modes. Notably, we were selected for the $1.2 billion Warringah Freeway upgrade in New South Wales, enhancing transport across Sydney Harbor. In maritime, we won sustainable design and program management for King Abdul Aziz Port in Dammam, Saudi Arabia. In air transportation, we are the integrated program manager for the Solidarity Transport Hub in Poland, a significant project aimed at zero carbon operations. Our established relationships and framework agreements have led to substantial wins with U.S. transportation agencies and Transport for London, reinforcing our leadership in navigating complex transportation challenges. In summary, we anticipate ongoing investment in our P&PS client sectors, with promising global wins in the first quarter of our new fiscal year indicating our readiness to deliver exceptional value as investment momentum grows from the U.S. Infrastructure Act and other economic initiatives. Now let me discuss PA Consulting on slide nine. As mentioned by Steve, PA is surpassing expectations, notably extending consultative services to the U.K.’s National Health Service, focusing on long-term vaccine deployment and pandemic preparedness. PA's growth is also boosted by new digital solution contracts with U.S. biopharmaceutical clients in cell and gene therapy fields. We are advancing our synergy growth and ongoing collaboration. The Jacobs PA team has recently secured a contract to expand a biotechnology manufacturing facility, integrating digital clinical trial information into the design and layout. We also continue to earn Joint Strategic Consultancy Awards globally in the transportation space. I look forward to our continued progress with integrated service offerings to our clients. At COP26, PA showcased its expertise in ESG and introduced innovative EV battery charging technology, ChargePoint. Additionally, PA received recognition for collaboratively developing a COVID-19 awareness and Situational Intelligence tool with Unilever. The business has surpassed its current expansion targets for the year and is set for further growth in the future. I will now hand it over to Kevin.

Thank you, Bob, and good day to all listening on this call today. Turning to slide 10 for a financial overview of fourth quarter results followed by our fiscal year review. As we have previously communicated, our fiscal fourth quarter 2020 had 14 weeks compared to our normal 13-week quarters, which impacted our quarter year-over-year growth rate by 7% and our full year growth rate by 2%. Fourth quarter gross revenue increased 2% year-over-year and net revenue was up 7%, including the pro forma impact from all acquisitions and adjusting for the year ago extra week, net revenue was up 6% for the quarter. Adjusted gross margin in the quarter as a percentage of net revenue was 27.2%, up 370 basis points year-over-year. Consistent with last year, the year-over-year increase in gross margin was driven by a favorable revenue mix in both People & Places, CMS, as well as the benefit from PA Consulting, which has a strong accretive gross margin profile of nearly 50%. We will continue to focus on increasing gross margins as we bring to market higher value solutions for our clients. Adjusted G&A as a percentage of net revenue was up year-over-year to 17%. Within G&A, during the quarter, we incurred an approximate $20 million or $0.12 per share charge to a legal settlement cost, which impacted both GAAP and our adjusted results. This charge was related to a CH2M legacy matter surrounding a previously completed product advisory arrangement. GAAP operating profit was $252 million and was mainly impacted by $46 million of amortization from acquired intangibles. Adjusted operating profit was $303 million, up 17%. Our adjusted operating profit to net revenue was 10%, up 85 basis points year-over-year on a reported basis. GAAP EPS from continuing operations rounded to $0.34 per share and included $0.45 primarily related to the U.K. statutory tax rate changes and other tax-related items, $0.40 related to the final mark-to-market of the Worley Stock and related FX impact, $0.23 of net impact related to amortization of acquired intangibles, $0.10 of transaction and other related costs and $0.06 from Focus 2023 and other restructuring costs. Excluding these items, fourth quarter adjusted EPS was $1.58, including the $0.12 burden from the previously discussed legal matter. During the quarter, PA’s continued strong performance contributed $0.23 of accretion net of incremental interest. Q4 adjusted EBITDA was $310 million and was up 12% year-over-year, representing 10% of net revenue. Finally, turning to our bookings during the quarter, our revenue book-to-bill ratio was 1.3 times for Q4, positioning us well for the developing growth momentum we expect over the course of fiscal year 2022. Now turning to a recap of our full year fiscal year 2021 on slide 11. Gross revenue increased 4% and net revenue was up 7%. Including the pro forma impact of all acquisitions and adjusting for the extra week in the year ago period, net revenue was up 3% for the full year. We continue to enhance our portfolio to higher value solutions, which is evident as gross margin as a percentage of net revenue was 26% for the year, up 235 basis points year-over-year. We expect mid single-digit reported revenue growth in the first quarter of fiscal 2022, with an acceleration in the second half of our fiscal year, driven by U.S. infrastructure spending and the ramp-up of new awards in our CMS business. GAAP operating profit was $688 million and was mainly impacted by the $261 million of purchase price consideration for the PA Consulting investment and $150 million of amortization of acquired intangibles. Adjusted operating profit was $1.188 billion, up 23% and represented 10% of net revenue. Adjusted EBITDA of $1.244 billion was up 18% year-over-year to 10.6% of net revenue and just above the midpoint of our increased fiscal 2021 outlook. GAAP EPS was $3.12 and was impacted by a $1.96 from the PA Consulting purchase price consideration and valuation allocation, $0.77 of amortization of acquired intangibles, $0.57 related to the U.K. statutory rate change and other U.K. related tax items, $0.35 of net charges related to Focus 2023 deal costs and restructuring, and all of this being partially offset by a net positive $0.48 from the final sale of Worley and C3ai equity stakes. Excluding all of these items, adjusted EPS was $6.29, also above the midpoint of our previously increased outlook. Of the $6.29, PA Consulting contributed $0.48 to that figure. Before turning to LOB performance, I would like to highlight that we are currently working on a further optimization of our real estate footprint. As a result, while we are still reviewing key components of the plan, we expect the potential non-cash impairment charge ranging from $60 million to $70 million in the first half of fiscal 2022. Our new footprint will facilitate virtual work options that leverage new technology and more collaborative workspaces in our offices. Regarding our LOB performance, let’s turn to slide 12. Starting with CMS, Q4 2021 revenue was down 5% year-over-year, but when adjusting for the extra week in Q4 2020, it was relatively flat on a pro forma basis. Let me remind you of the transitional dynamic impacting CMS revenue growth related to the transitioning off of two lower margin contracts. This represented $175 million year-over-year revenue impact during the quarter. When excluding the contract sign-off and adjusting for the extra week a year ago, pro forma CMS revenue was up double digits year-over-year. In 2022 Q1, we expect to continue to see an approximate $210 million year-over-year impact from these two contract roll-offs, and this will phase out in Q2. As a result, we expect the reported revenue in the first quarter of 2022 to be down slightly on a year-over-year basis, with underlying growth being much stronger. We expect the CMS growth trajectory to improve over the year, resulting in a reported mid-to-high single-digit full year 2022 growth rate. Q4 CMS operating profit was $115 million, up 7%. Operating profit margin was strong up 100 basis points year-over-year to 9.1%. For the full year, CMS operating profit was $447 million, up 20%, with an 8.8% operating profit margin. The improvement for the quarter and the year in operating margin was driven by our strategy to focus on higher margin opportunities across the business. We expect operating profit margin to remain in the mid-8% range through fiscal 2022. Moving to People & Places, Q4 net revenue was flat year-over-year. When factoring in the impact from the extra week, P&PS grew net revenue approximately 8% year-over-year for Q4 and was up 2% for fiscal year 2021. In Q4, total P&PS operating profit was down year-over-year, driven by the $20 million legal settlement costs I described earlier. Adding back the legal settlement costs, operating profit growth would have been up 8% in Q4. For the fiscal year, operating profit was up 5% or 8%, excluding the legal settlement. In terms of PA’s performance, PA contributed $273 million in revenue and $66 million in operating profit for the quarter. Q4 revenue grew 41% and 32% year-over-year in sterling. Q4 adjusted operating profit margin was 24%, in line with our expectations. On a full year basis, PA Consulting grew revenue 33%, 24% in sterling, with an adjusted operating profit margin of 23%. Our non-allocated corporate costs were $55 million for the quarter and $190 million for the full year. These costs were up year-over-year and in line with our expectations. This increase was driven primarily by the expected increases in medical costs and IT investments related to our new ways of working. In fiscal 2022, we expect non-allocated corporate costs to be in the range of $200 million to $250 million given continued increases in medical costs and other investments. These corporate costs, as well as Focus 2023, CMS, P&PS investments will precede our expected acceleration in revenue growth and profit later in 2022. In summary, these increased investments ahead of our growth will likely result in our Q1 profitability and EPS being relatively flat versus our Q4 results, with Q2 then showing improvement and further acceleration occurring in the second half of the year. Turning to slide 13 to discuss our cash flow and balance sheet, during the fourth quarter, we generated $176 million in reported free cash flow as DSO again showed strong improvement. The quarter’s cash flow included $22 million of cash related to restructuring and other items, with $16 million related to a real estate lease termination as we take advantage of virtual working. For the year, free cash flow was $633 million, which was mainly impacted by the $261 million of PA purchase price consideration treated as post-closing compensation that we discussed last quarter. Regardless, our reported free cash flow represented 133% conversion against our reported net income. For the whole year 2022, we will again target an adjusted free cash flow conversion of at or above 1 times. As a result of our strong cash flow, we ended the quarter with cash of $1 billion and gross debt of $2.9 billion, resulting in $1.19 billion of net debt. Our pro forma net debt to adjusted expected 2022 EBITDA is approximately 1.3 times, a clear indication of the strength of our balance sheet. During the quarter, we monetized our Worley Stock for $370 million and executed a $250 million accelerated share repurchase program. We will continue to monitor for any material dislocation in our share price given the strong long-term secular growth opportunities for our company. And finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 11% earlier this year to $0.21 per share. Now I will turn it back over to Steve.

Thanks, Kevin. We are introducing our fiscal 2022 outlook for adjusted EBITDA to be in the range of $1.37 billion to $1.45 billion, which at the midpoint represents double-digit growth. Our adjusted earnings per share outlook for fiscal 2022 is in the range of $6.85 to $7.45. We expect a multiyear benefit from the U.S. Infrastructure Investment and Jobs Act to support our growth in the second half of fiscal 2022. As we look beyond this year, we see substantial opportunities for sustained organic growth driven by infrastructure modernization, climate response and digital transformation. We anticipate approximately $10 of adjusted EPS in fiscal 2025. At our in-person investor event in March we will further expound on our long-term strategy and financial model. Operator, we will now open the call for questions.

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

Steve, as you built the portfolio, it’s clearly been a focus to bring together green businesses and because of the idiosyncratic ESG scoring unfortunately, you folks aren’t getting much credit for that, ESG funds are 80% underweight Jacobs. How does that impact the way you folks view the CMS portfolio or portions of the CMS portfolio going forward?

Well, look, there are some investors that are holding back because of some of our work which is really a very small portion, probably, less than 2% of our overall revenue that is really focused around what I would call critical national security for the U.S. Government and we are reaching out to those investors to try to explain that we are not involved in things like the manufacturing of nuclear weapons or whatever is holding them back. But I really think that as people understand sort of the fact that we are probably the largest public company delivering ESG climate change solutions out there that, as they see that ramping up and get more clarity, I think, we are going to attract a lot more investors that want to be part of the ESG story.

Just a clarification, is divestiture of that 2% on the table at all? How are you thinking about that within the portfolio context?

Look again, it’s so small that we haven’t really thought about that. But like anything else, Jerry, over the next few years, you will hear a little more about the stern strategy. We are going to continue to look at our portfolio and make sure we are aligned with all the right growth dynamics and I think we have proven that up to now we will continue to transform our portfolio in the right direction.

Okay. Thanks.

Hey. Good morning.

Good morning.

I was curious if you could just give us some perspective just on global CapEx expectations into 2022. You guys have such a large global portfolio and touched so many different markets. From your view, what are customers generally planning for CapEx heading into 2022 as they look to move out of the pandemic?

I believe there are a couple of important points to mention, particularly regarding the customers that Bob discussed in his comments about our advanced facilities, which are performing exceptionally well. The semiconductor shortage is significant, and many of our clients are looking to expand their capacities substantially over the next few years. Additionally, our private clients are increasingly considering their spending on environmental solutions and how they can alter their operations to support a more sustainable global economy, which is evident. The same applies to our government services sector. I think capital expenditures are quite strong in this area. Lastly, I want to highlight that our environmental and energy transition businesses are also engaging with the oil and gas sector, helping them develop additional capabilities to improve their contributions to global climate initiatives. Overall, we are focused on a wide range of areas, and many of our projects are heavily centered on these themes, which we believe will stimulate further capital expenditures in the long term.

Hi. Good morning. I guess first question the EPS target that you put out there for 2025, the $10, supports obviously, good growth there. Kevin, can you just talk about, one, are there costs to achieve the $10 in terms of restructuring or investment? And then on the $10, can you provide some parameters sort of topline margins, do we need to utilize the balance sheet in terms of M&A or share repurchase to help achieve the $10? So, I guess, that’s my first question. I will start there.

Thank you, Jamie. The $10 is an organic figure that we are referencing and does not involve significant capital deployment. There is potential for upside in those numbers, but we are currently refining our strategy, which we will discuss further in March as Steve mentioned. Some of your questions may be a bit early as we finalize our work on margins and other aspects. You can generally assume that our margin will not decrease in relation to our overall goals. Regarding the costs to achieve this, we believe most initiatives will be part of our regular operational expenses. I also mentioned that we are focused on further optimizing our real estate footprint.

Yeah.

We are expecting…

Okay.

...a potential impairment of 60 to 70, maybe up to 70 in the first half, maybe even in the first quarter. And then if I think about other things, there’s not going to be significant money on top of that, maybe 25 to 50 in 2022, and then 2023 and beyond, TBD, I would say. And so we are really thinking that we like the portfolio and other than things that would occur relative to integration of acquisitions and deal costs and those kinds of things probably somewhat de minimis in terms of restructuring costs outside of those.

Great. Thanks. Good morning. One of the things I think the business and the stock really needs is kind of a breakout to the upside on the P&PS organic revenue growth and it seems like we started to see that this quarter. But, I think, Kevin, you said maybe 8% NSR growth, which is, I think, up from about 1.4% for the last couple of quarters. So maybe just more qualitatively to what extent are you really seeing a breakout on that P&PS growth now? So what’s the organic assumption you have for the rest of fiscal 2022, because you give us some color on Q1 and what have you factored in there exactly for stimulus as part of that growth? Thank you.

So let me take it, and then, Bob, you can add any commentary if you would like to. Look, we are in this period of time in our Q1 and Q2 primarily where the numbers aren’t really going to be impacted yet by the stimulus. We believe that’s more a Q3 event. Maybe we get a little bit in Q2 but likely not and that is more Q3 and an acceleration into Q4 that we would expect the benefits associated with the stimulus and so we are excited about that. Having said all of that, I do believe our incremental growth going forward in Q1 and Q2 is going to be more solid than what we have been seeing over the last few quarters. And so we are starting to see some of that benefit of the advanced facilities, certainly not as much in Q1 but in Q2, and so I do think we will see some good solid growth in Q1 and Q2 on People & Places, and then it will accelerate again, hopefully, into the Q3 and Q4 numbers. So we feel good about the developing momentum. I did make the comment that we are investing in front of that growth, too. So we are not going to see a lot of incremental margin associated with that because we are investing heavily.

What I would add to that, Kevin, is that the optimism we have stems from our bookings. Starting the year, our bookings have been solid. It's important to consider the project life cycle; these bookings begin with consultative services at the forefront of various programs and projects, which then progress through subsequent phases where our services will increase. Overall, these are strong leading indicators that align with what Kevin is saying.

Hey. Good morning, guys.

Good morning.

Good morning.

Can you provide more details about what's happening in CMS? Kevin mentioned that the CMS margin would remain in the mid-8% range for FY 2022, yet the margin exceeded 9% in the last quarter, even with significant contributions from lower-margin contract work. Is there something currently affecting your margin for FY 2022? Additionally, your CMS backlog has increased by double digits, which appears to indicate that you can achieve your mid-to-high single-digit revenue guidance. However, will you need to see an increase in awards or revenue burn compared to what was recorded in Q4 to reach that target?

So, CMS specifically, as you may recall, two years, three years, four years ago, when we did have these lower margin large contracts, we were in the 5% to 6% operating profit margin and we have now built over time that to the mid-8% number, which is great and it’s consistent with our strategy. As we look about 2022 specifically, we will have ramp on some other lower margin business associated with Idaho and other nuclear remediation work. But that’s not going to dampen our margin. It’s just going to hold it flat for 2022, and then in 2023 and beyond, we started to see incremental margin above that as well. So it’s a continuation of a long-term margin play. It’s just ebbs and flows when the big contracts come in, the margins associated with them. So 2022 is a little limited in terms of incremental margin and then we start to build again in 2023 and beyond.

So just for the, Operator, there’s some background noise. I don’t know if it’s your side that you are opening it up for questions. So could you double-check that?

Hi. Good morning, guys. So just wanted to dig into PPS. I think you got so many opportunities ahead, the climate change, semiconductor, infrastructure, digitization. How are you guys sizing the effects? Can you just talk about the relative rank of the size of the opportunity and then just thinking through just where you guys stack up in terms of competitive dynamics in those specific segments?

Chad, could you please repeat the beginning of that question? It's a bit unclear.

Yeah. Sure. So, I was just saying, in PPS, it seems again just so many different opportunities ahead from climate change, the semis, infrastructure, digitalization and I just want to understand just how you guys are sizing the effects across all those opportunities, if you can talk about the relative rank in terms of the size of opportunity and your relative competitive positioning in those?

Sure. So as far as prioritization goes, I would say that, kind of, if you were to segregate into two buckets, one around climate change and the second round all those things that are creating the supply chain disruption. Those are the ones that are coming to priority right now. I’d say on the climate change piece and this is where the portfolio optimization is really helping us. We are honing in on those areas that we have a sound market leadership and long-term client relationships, and where we can deliver immediate value. And those are squarely around transportation, water resiliency and in all of the environmental impacts that are affiliated with climate change. And so those client relationships that we have had have been pretty robust for several years and are supporting those opportunities. Around advanced facilities, this is a multi-decade type of leadership approach that we have had specifically in semis, but also in life sciences that, that’s been a legacy business of ours forever. And so we are seeing those opportunities again not searching for them, these are long-term client relationships that we have had, and we are kind of in the capital planning for those clients. And so it’s really gaining share with long-term clients that’s setting the priorities.

Hi, gentlemen. So I am just looking at the 2025 target. I think that implies around 12% earnings growth CAGR over the next couple of years. Seems like at the midpoint of the fiscal 2022 guidance, you are going to outpace that? And I just wanted to reconcile that considering the way you described the cadence of fiscal 2022 earnings, it seems like the exit velocity is going to be quite strong and that we should actually see accelerating earnings growth out of fiscal 2022? So I hope that question makes sense, just wanted to talk through the mechanics there, maybe there’s some conservatism, any commentary there would be helpful?

Look, I think, what we do when we put forth our indications of what we expect our business to do, we think those are numbers that are obviously going to be able to be executed against. And so, yeah, there’s a lot of moving pieces, and you are right, we will hopefully exit this year with a greater velocity than what we entered clearly and so we will see how that plays out. But I think, ultimately, what’s clear is that we have got to, whether it’s 12% or 11% or 13% or 14%, whatever it ends up being, we are going to have a long haul of good solid margin enhancing growth in front of us.

Good morning, everybody. Maybe, Bob, you can share a little bit of your thoughts on your recent acquisitions and other opportunities in the pipeline from CMS, certainly increasing your cyber/intel higher margin business. But also on the PPS side, I know you put things out into your long-term guide on acquisitions. But how do you see that and is the company set to achieve these targets with the employees and professionals that you have and is there going to be some interesting opportunities to leverage some of that PA work as you get more collaborative to drive even further growth to serve the client base?

Hi, Michael. Let me elaborate on that. First, regarding our acquisitions, we are enthusiastic about our recent activities. The acquisitions of the Buffalo Group and BlackLynx fit perfectly within our cyber and intelligence strategy. The Buffalo Group has helped us diversify our client base and enhance our advisory services, which has yielded excellent results. Some of our recent successes over the past nine months have aligned well with this strategy. BlackLynx is enabling us to integrate software solutions alongside our advisory services focused on automation and data processing at the edge, all related to security. We are looking forward to the benefits these acquisitions will bring, especially in conjunction with our long-term advisory platforms and existing agency relationships. In terms of prospects in the P&PS sector, our situation is similar to our opportunities in cyber and intelligence technology. We possess strong domain knowledge built over decades in these markets, and our acquisition strategy has aimed to supplement this with technology-enabled solutions. We are reviewing our pipeline and it looks promising, with more updates to come, as Steve mentioned during Investor Day. We are also closely monitoring our employee base. Our global presence is a significant advantage, allowing us to leverage high-end talent from various locations to provide localized solutions. As we navigate labor shortages in the western hemisphere, we are expanding our workforce in different locations worldwide, which has been a crucial part of our strategy. Finally, regarding PA, we are exploring collaborative opportunities. Many of our PA clients are part of the same C-suite and technology frontiers as the clients working on innovative global projects. We are observing an increase in collaboration, and we hope to share more wins soon. For example, our recent DEFRA win in the U.K. and another undisclosed win in the biotechnology sector demonstrate the effectiveness of offering expertise throughout the entire lifecycle of a project. This approach is gaining significant momentum, and we are excited about our prospects in all areas.

Good morning, everyone. I wanted to follow up on the outstanding bids. I think you mentioned $10 billion in source selection. Can you provide insight into the phasing of the adjudication timeline? Are you anticipating a strong December quarter for bookings? Additionally, could you discuss the impact of the continuing resolution on the range of outcomes at CMS, particularly regarding recompete concentration in the upcoming fiscal year? How much of the business is up for rebid? Thank you.

We are quite confident that the ongoing resolution and defense budgets will be resolved in the coming months. We anticipate an increase in the Department of Defense budget and are optimistic about growth in areas like space and cyber, particularly in classified projects where we have strong alignment, as well as in hypersonic and telecom sectors. We believe we are well-positioned with organizations like NASA and the way their budgets are being allocated. The main issue is timing. There has been a slight delay as government clients await the budget outcome. Once that is finalized, we expect to move forward with several near-term opportunities, whether that happens in December or the second quarter. That’s why we are optimistic about the upward trend in CMS revenue growth as we progress through 2022.

Just a follow-up on your question on rebids. There is at the end of the year a couple larger rebids that we are going to have to be thinking through. But there’s really no rebid risk embedded into the 2022 year assumptions.

Thank you for taking my question. Kevin, to follow up on Sean's question, you achieved the high end of your EPS range in 2021, and the midpoint reflects a 14% growth. With infrastructure ramping up and CMS incrementals significantly increasing in 2023, is there anything we should be aware of that might prevent earnings growth from accelerating or cause it to decline by 2025? Are you suggesting there's recompete risk or a higher level of SG&A affecting margins? Please help us understand, as we know you'll provide more details at the Investor Day. Considering the $10 EPS and the earnings growth projected for this year, which is backend loaded, what factors could potentially hinder that earnings growth?

Well, look, we are talking 2025 here. That’s four years from now. We are still in the midst of a pandemic and I think it’s prudent to put some variability about what the world looks like four years from now. So I think the most powerful message about the $10 is we are putting that number out there even if the economic situation is not in a good place in 2025. So, look, I think it’s prudent. Prudent to put out numbers that are appropriate and we feel like we can get after, and by the way, that’s four years from now. So a lot can happen in four years.

Thank you.

Hey, guys. Good morning, again. I just want to follow up on PA Consulting, because you recorded almost $0.50 of accretion in 2021. I think that’s essentially double your original guide when you announced the deal. I know you probably don’t want to tell us what’s embedded exactly in FY 2022. We know what your original guy was there, but maybe you can give us color? And what has at PA exceeded your expectations by such a wide amount and what does that mean for Jacobs moving forward?

That's a couple of points, and I think I'll hand it over to Bob for more insight. First off, the significant growth we’ve seen is largely driven by the work related to the pandemic and the projects we've undertaken for the U.K. Government, which has performed exceptionally well. Looking ahead to 2022, while we expect continued growth, it likely won’t match the rapid pace we have experienced. They need to devise a strategy to acquire new business to offset the projects that will be concluding. Thus, expectations for 2022 are uncertain. However, both 2021 and 2022 have shown remarkable performance with good margins, and the execution has been impressive. Moreover, the partnership between PA Consulting, People & Places, and CMS is developing strongly, opening up promising long-term growth opportunities for PA and Jacobs as well.

Maybe two areas that we knew about, we probably didn’t fully give credit to the depth of the two things I am about to mention. One is the applied technology ability that they have. You see consulting firms that have kind of a roadmap or a recipe or a methodology that they utilize for different challenges and then proposing solutions. PA is applied, applied technology to solve a unique issue. And so that has really paid some dividends, especially with the new work. Kevin and I talked about the U.K. work, but this is now what we are seeing in the U.S. And then the second is around the depth of relationship. The depth of relationships that PA has and where to connect in the client organization and really hone that relationship through performance has been extremely impressive and is, again, we knew about it, it’s exceeded our expectations.

Okay. Thank you very much. Look forward to talking to you again next quarter.