Jacobs Solutions Inc (J) — Q4 2022 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'll 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. Now turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Steve Demetriou; President and Chief Operating Officer, Bob Pragada; President and Chief Financial Officer, Kevin Berryman. Steve will begin by reviewing our fourth quarter results and then provide an overview 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 flows. 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 Demetriou, Chair and CEO.

Thank you for joining us today to discuss our fourth quarter and fiscal year 2022 business performance and 2023 outlook. As I transition to Jacobs' Executive Chair, I'm excited and confident about the next phase of our strategy as we move forward boldly. This strategy continues to enhance our high-performance culture to seize significant growth opportunities we've identified in climate response, consulting advisory, and data solutions, benefiting from the recurring nature and diversity of our core businesses. We believe the rigorous execution of this strategy will lead to improved long-term revenue growth and an expansion in our profit margins. Throughout our last two strategies, we focused on reshaping our business through organic investments, acquisitions, and divestitures, delivering value for all our stakeholders, including shareholders. Since we started our journey together in 2016, we transformed our culture and brand, increased revenue, and broadened profit margins, resulting in a total shareholder return of around 250%, nearly double that of the S&P 500. We believe the next phase will be just as transformative as we uphold our brand promise of challenging today and reinventing tomorrow. Let's now look at our fourth quarter results. We are experiencing strong demand with numerous robust opportunities in our sales pipelines, evidenced by several recent marquee wins that highlight our strategy. In the quarter, net revenue rose by 6% year-over-year and 11% on a constant currency basis, showcasing consistent growth across all lines of business. Backlog increased by 5% from the previous year's quarter and 8% on a constant currency basis. In People & Places Solutions, our advanced facilities business achieved double-digit year-over-year growth in both revenue and operating profit for the fourth quarter. Additionally, the other P&PS units also saw year-over-year growth in constant currency. In the current quarter, Critical Mission Solutions is starting to see previously delayed opportunities come to fruition, including a major cyber win last week and another win nearing the end of the protest period. PA Consulting, in constant currency, continued to show strong growth in Q4 with revenue climbing 9% and backlog increasing 8% year-over-year. PA successfully secured a large multiyear contract with the Ministry of Defense to equip the next-generation soldier in a digitally enabled battlefield. For the full year, we ended within our original guidance range, even when accounting for the translation impact from the strengthening U.S. dollar, achieving double-digit growth in net revenue and operating profit 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 first quarter 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. Our data solutions are aligned to three high-growth verticals of transportation, water and national security. A competitive differentiation of our vertical software platforms is access and integration of unique data sets and the ability to turn that data into actionable outcomes for our customers. For example, our StreetLight Data platform is a SaaS solution that ingests 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 and 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 AquaDNA and our intelligent operations maintenance solution can save 10% to 30% in energy use for wastewater treatment. We continue to expand our water solutions across our clients' assets life cycle. From a national security standpoint, our extreme search solution has proprietary algorithms and compute ability that can rapidly search 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 types of solutions 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 few years. Every single day, Jacobs is providing critical solutions globally. For example, most recently, supporting NASA for the Artemis launch to move or 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 to have experienced a dynamic leader who brings decades of industry domain knowledge and a proven track record to lead our boldly moving forward strategy into the future.

Thank you, Steve. 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, 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 seven years. He is an incredible leader who inspires all around and will leave a tremendous legacy at Jacobs. I'll begin on Slide 6, discussing our People & Places Solutions business where we achieved strong top and bottom line results with backlog up 8% year-over-year and 12% in constant currency. With critical infrastructure priorities on the rise over the past year, our quarter results show that we've been successful in converting opportunity into accessible backlog. This success is underpinned by our global workforce which expanded 12% this year. For example, in FY '22, our advanced facilities operating unit operating profit grew by well over 25% and on a constant currency basis due to our scalable multi-geography delivery teams. Overall, we see our quarter results as Jacobs' 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. Across these themes, I'll highlight how our technology and data solutions enable our success. First, 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 telemedicine 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. 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 Centers 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, an expanding list of automobile and EV manufacturing clients are seeking Jacobs' leading support to develop sustainable production capacity. Moving to climate response. Global demand for affordable green energy led to an increase of over 33% in bookings with wins across multiple geographies, including the U.K.'s National Grid, U.S. Department of Energy and Korea where we're developing a new green hydrogen production and import facility. 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 brand 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 in human casualties due to flooding and other climate-driven disasters. 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 AquaDNA, Dragonfly and intelligent operations maintenance. These integrated AI and ML 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, the U.K., Singapore and Australia. These innovative platforms are driving the 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 Hickam. Under infrastructure modernization, mega program delivery trends continue as clients look for more efficient ways to deliver sustainable, livable places. In Scandinavia, we are designing the Nord Aven tunnel to across the harbor in Copenhagen, Denmark. And in Toronto, MetroLinx recently awarded Jacobs a multiyear extension to support their $85 billion regional transit expansion. In summary, People & Places 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 sustainable lasting outcomes. Moving to Slide 7 to review the Critical Mission Solutions line of business. CMS delivered solid performance in the fourth quarter with backlog remaining strong at $10.6 billion, flat year-over-year, with gross profit in backlog up 10% year-over-year and 12% in constant currency. Our CMS strategy is focused on creating diligent revenue growth and margin expansion by offering technology-enabled solutions aligned to critical national priorities. CMS's service and solutions offerings 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. The Artemis 1 launch is historic and we are proud of Jacobs' role in the mission. Also, we were awarded contracts by the Scottish rocket manufacturer and small satellite launch service provider, Ursa Major, 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 Zero Trust Architecture, hypersonics and modular reactors. Beginning with Zero Trust Architecture or ZTA. The White House Executive Order mandates adoption of ZTA cybersecurity models across the federal government. Importantly, ZTA requires continuous verification of identity as users move laterally through network systems. Jacobs' cyber intelligence team, which is now part of our new Divergent Solutions operating unit, is the program manager for one of the intelligence community's largest initiatives, responsible for identity, credential and access management, ICAM. ICAM is a critical architectural component of effective Zero 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 requiring ZTA adoption. In Q4, our cyber intelligence team also won several new non-ZTA contracts, including an agile software development and sustainment 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 million six-year IDIQ, 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. Department of Defense is developing missile defenses to defend against hypersonic weapons and other emergent threats. Because hypersonic weapons fly at speeds of at least mach 5, roughly 1 mile per second, and can maneuver in route to their target, they 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. In the last quarter, Jacobs was awarded a five-year $100 million IDIQ to help the U.S. Navy design and operate an underwater launch test system. 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. Finally, demand for modular reactors. Nuclear power is coming into favor as a clean energy alternative to fossil fuels. For countries to achieve their net zero carbon emissions goals and ensure energy independence and security, leaders are realizing they need to include the always-on 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 siting flexibility on smaller grids and isolated areas and greater energy efficiency. In the U.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 modular reactors that can be designed to provide specific benefits such as producing high heat for green hydrogen. We are supporting multiple AMR vendors in the U.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 visibility for our solutions in FY '23 with approximately 85% of CMS's portfolio consisting of large enterprise contracts with durations greater than four years. We are also pleased with the Government Accountability Office's recent guidance to have the U.S. Air Force reevaluate proposals for its large Integrated Support Contract, ISC 2.0, in support of a new source selection decision. Therefore, this remains in our pipeline as a potential multibillion-dollar opportunity. The CMS sales pipeline remains robust with the next 24 months qualified new business at approximately $30 billion, including $10 billion in source selection with an expanding margin profile. Moving on to PA Consulting on Slide 8. PA continues to deliver its strategy and is securing exciting and enduring work. PA's deep insight, lasting relationships and ability to assist clients through economic cycles are generating consistent demand for its expertise. This quarter, PA was awarded marquee wins across the key markets. As Steve mentioned, in the U.K. public sector, where it's a major player, PA was selected as the lead systems integrator for a multiyear contract providing next-generation solutions to counter threats posed by radio-controlled improvised explosive devices, IEDs. The contract leverages PA's extensive experience in major program delivery as they lead the delivery consortium, Team Protect. PA was also appointed to oversee the delivery of a once-in-a-generation program for social care reform in the U.K., further cementing its position in government and the public sector. Transport continues to be a major focus with additional awards won at Schiphol Airport in the Netherlands, where the joint capabilities of Jacobs and PA continue to create further opportunities to include boardroom advisory and the digitalization of airside operations. The Jacobs-PA partnership is strongly positioned to continue to capitalize on substantial market opportunities. Jacobs' 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.

Thank you, Bob. And turning to Slide 9 for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 8% year-over-year and net revenue was up 6% and also up 11% year-over-year on a constant currency basis. All lines of business grew fourth quarter revenue over 9% versus a year ago in constant currency. Adjusted gross margin in the quarter as a percentage of net revenue was 26% and improved slightly from the third quarter but was approximately down 130 basis points year-over-year, primarily driven by: one, our CMS line of business due to the newly ramped remediation contract; and two, investments in incremental employees in technical areas in advance of large wins such as the U.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, a favorable revenue mix, recent wins in PA Consulting and continued strong performance in our People & Places Solutions business. Adjusted G&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. We are targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $309 million and was mainly impacted by $52 million of amortization from acquired intangibles and other acquisition deal-related costs and restructuring efforts of $14 million, with over half associated with integration costs of acquisitions. And finally, a positive benefit from third-party recoveries of $27 million pretax, which we excluded from our adjusted results. Adjusted operating profit was therefore $347 million, up 15% year-over-year. 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. 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 third-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 $0.06 from transaction, restructuring and other related costs. Excluding these items, third quarter adjusted EPS was $1.80, up 14% year-over-year and up 18% in constant currency. Jacobs' consolidated Q4 adjusted EBITDA was $350 million 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. 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. As a result, on a constant currency basis, backlog was flat sequentially. The revenue book-to-bill ratio was 0.94x with our gross margin book-to-bill at 1.05x given a 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 such time as the rebid is awarded. Now moving to Slide 10 for a brief recap of our full year 2022 performance. Fiscal year gross revenue grew 6% year-over-year and net revenue grew 10% in constant currency. 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 million, up significantly year-over-year, driven by a material decrease in one-time items related to transaction and restructuring 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. Adjusted EBITDA was $1.36 billion, 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 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 0.97x and gross margin book-to-bill was over 1 at 1.05. Regarding our line of business 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, winning contracts contributed approximately $22 million to the fourth quarter revenue. Fiscal 2022 revenue on a reported basis and constant currency grew 3% as the first part of the year did not benefit from the ramp of the Idaho nuclear remediation win. Other opportunities contributed $50 million 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 million, 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%. Consistent with our previous outlook, Q4 operating margin percentage was impacted by a rate true-up in our cyber and intelligence business. The rate true-up was related to higher G&A 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. Moving to People & Places Solutions. Overall, P&PS 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 P&PS region demonstrated net revenue growth. For the full year, P&PS 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 stellar quarter of double-digit revenue operating profit growth. 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 P&PS International business Q4 revenue and operating profit were 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 will continue to be materially impacted by FX during fiscal 2023, resulting in flattish reported revenue growth but is poised for full year growth on a constant currency basis. Total P&PS 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 275 basis points, driven by revenue growth and mix as well as lower labor costs during the quarter. Full year People & 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 a year ago. In terms of PA's performance, PA Q4 revenue declined 7.7% year-over-year in U.S. dollars but it grew 9% in pound sterling. 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 MOD award for which we expect to show benefit later in 2023. We 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 million, 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 corporate costs to be $190 million to $210 million for fiscal 2023, which is slightly higher than fiscal year 2022 as we expect higher incentive costs on a year-over-year basis. 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 million in Q4 and included $12 million related to transaction costs and other items. On a full year basis, reported cash flow was $347 million but included the net $475 million of cash outflows related to the previously announced Inpex settlement, the first $55 million repayment of Cares Act payroll tax deferral and a net $4 million cash benefit related to other items. Excluding these items, free cash flow conversion to adjusted net income was 97% for the year. For fiscal 2023, we expect two items to impact cash flow: approximately $15 million of further cash outflows from restructuring, transaction and other related costs. And a final repayment of $60 million of Cares Act payroll 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 given 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 million of shares. And for the full year, we repurchased $282 million. After September, we have continued to be actively purchasing shares with approximately $135 million 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. We ended the quarter with cash of $1.1 billion and gross debt of $3.4 billion, resulting in a $2.3 billion of net debt. Our Q4 net debt to 2023 expected adjusted EBITDA of approximately 1.6x is a clear indication of the continued strength of our balance sheet. As of the end of Q4, approximately 60% of our debt is floating rate debt. As a result, we are expecting incremental interest costs going forward, which we have incorporated into our outlook. As of the end of the fourth quarter, our weighted average interest rate was approximately 3.6%. Early in the fourth quarter, we entered into a notional $500 million interest rate lock at a rate of 2.7% as related to a planned future fixed rate issuance. The mark-to-market benefit from the in-the-money interest rate lock is currently recognized in other comprehensive income but will offset interest expense of our future expected fixed income issuance. Also, in early October, we redeemed $481 million of private notes at par. In the appendix on Slide 16 of the presentation, we included additional detail related to our debt maturities, 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 fourth quarter of fiscal 2022 and paid on October 28.

I will now turn the call back over to Bob. 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 continue to demonstrate robust growth through multiple economic scenarios. We continue to enhance our overall growth rate with our climate response consulting and advisory and data solutions strategic accelerators. Given the volatility of foreign exchange rates, we are providing our outlook under two FX scenarios: one, an outlook based on constant currency which provides greater insight into underlying business performance; and two, an outlook based on more recent FX rates. Although we transact in multiple currencies, one example for reference is the pound sterling. The full year 2022 average conversion rate for the pound sterling was $1.28 compared to $1.15 early November 2022. As footnote in our earnings release and investor presentation, based on fiscal 2022 average rate, our outlook for fiscal 2023 adjusted EBITDA is $1.465 billion to $1.545 billion and 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 $1.4 billion to $1.48 billion and adjusted EPS of $7.20 to $7.50, both up 6% at the midpoint. On a net revenue basis, the difference between these two scenarios is approximately $430 million. Looking beyond fiscal 2023, we remain confident achieving double-digit constant currency adjusted EBITDA growth, consistent with our strategic plan.

Congratulations to both Bob and Steve.

Thanks, Bert.

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 '24 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?

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

Okay. And just a quick follow-up in terms of thinking about P&PS. It performed really well during the quarter, and you made some pretty positive comments on what you're seeing on the advanced facility side. Should we expect any sort of incremental softness just as your semiconductor clients slow their spend? And in terms of the infrastructure side of things in the segment, are you starting to see a material uptick from IIJA? Or is that just the plan as you sort of progress through '23?

Sure. Let me address the first question. The semiconductor industry is currently experiencing a period of soft demand overall. However, in the markets and among clients we serve, we have not observed this trend. The design work and momentum we've experienced over the past six to eight quarters continue unabated. We feel confident about our position within that consulting ecosystem, especially concerning our client base. Therefore, we remain optimistic. Regarding the IIJA, we are witnessing the development of the projects we've been monitoring through grants and formula funding come to life. A significant factor here is that the release of these funds is unlocking additional base funding that states had previously held back during COVID due to uncertainty about the future. Overall, the pipeline for infrastructure in the U.S. is up; we see a 5% increase without IIJA and an 18% increase with IIJA.

I would like to echo congrats to Steve and Bob on your new roles.

Thank you.

Thanks, Louie.

For Steve and Bob, you referenced several cyber intel awards associated with your key acquisitions. Are these awards margin accretive? And should the Critical Missions operating profit in 2023 be back to the 2021 level?

Both questions, Louie, the answer is yes. The awards that Steve and I specifically mentioned are coming in through the relationships we developed and the acquisitions we made during that period. We are indeed seeing that. They are margin accretive. On the flip side, these are awards we had anticipated in previous quarters, and we discussed this extensively in earlier earnings calls. The ongoing resolution has impacted when these awards begin. However, we do see margins increasing, and these awards are also acting as catalysts for that growth.

The other thing, Louis, is that 2021 was the peak. I would say the underlying business is recovering. We had some events in 2021 that pushed the margin a bit higher, including some strong one-off closeouts. However, I believe that in 2023, the underlying business is improving and getting close to the 8% range. We may not reach the 9% we had in 2021, but we are aiming for consistency with the underlying performance from that year.

Could you provide insights on P&PS and PA Consulting regarding the improved book-to-bill and gross margin book-to-bill? Would you also share the actual numbers? Additionally, considering the timing of awards, ramp-up, and some utilization issues you encountered in 2022, do you anticipate better growth in the latter half of 2023 as we approach the end of the year?

Yes, I understand. Thank you, Mike. People & Places continue to demonstrate a strong margin profile and backlog, which are crucial to our strategy. When we focus on delivering enhanced value-added solutions, the margin is essential. The backlog margin profile is stronger in People & Places and also improved in PA. The performance in PA compared to the Q4 figures is primarily due to continued utilization. We aimed for around 20% utilization and fell slightly short, but it is on an upward trend, and we expect to return to the more normalized levels experienced in early '22 concerning the margin profile.

Congratulations, Bob. And congratulations, Steve. My first question is about the long-term strategic importance of CMS to the portfolio. If margins continue to underperform, would you consider alternative options, or do you believe there is a way to reach the margin improvement targets outlined for 2024? How long do you anticipate it will take to get there? My second question, Kevin, pertains to the strong cash flow generation you are projecting for 2023 and the good state of your balance sheet. I would like to understand your thoughts on the M&A profile compared to share repurchases.

Yes. It's Steve here, Jamie. So I can speak for both the Board and management around that question is we, first of all, the whole strategy around Divergent Solutions was to break out the elements of CMS that are highly consistent, especially with the data solutions side of our three accelerators; and so obviously. We're excited about that. 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 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 technology of advanced small modular reactors. So, we're excited about the future of those and we'll continue to monitor the entire company as far as fit, et cetera, 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.

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 deploy that additional capital that's available. So look, I think we continue to monitor the M&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 three accelerators that we outlined in strategy, and we're continuing to monitor those opportunities. There are things out there that are being evaluated obviously. It's got to result in a bid equaling ask where we feel like we can add an ROIC and a return profile to our shareholders that are appropriate; 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 the share repurchases. 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.

Steve and Bob, congratulations.

Thank you.

Thank you, Jerry. Bob, I'm wondering if you could just talk about your strategic priorities over the next three to five years just from a high-level standpoint, anything that we should be keeping in mind? Yes, Jerry, I've been considering this a lot. I want to make a couple of initial comments before addressing your question directly. First, I want to highlight that Steve's approach to leading the executive team and the company has been very inclusive. Our strategy, not only the one we released last March but also those from '16 and '19, was developed collaboratively as a team, so I'm fully committed to it. The first major focus is our clients. The accelerators we have are aligned with national and global priorities that are influencing the world, and this will continue to shape our business as we develop more technology-driven and client-focused solutions. Secondly, we are investing in our people. They have repeatedly delivered exceptional results over the years. While our business has a strong U.S. presence, our workforce consists of approximately 55% in the U.S. and 45% internationally, which supports our commitment to global delivery. Continuing to invest in inclusion, diversity, and sourcing talent globally will be crucial. Lastly, I want to emphasize resilience within our operations, both in terms of our systems and the simplicity of our business structure. We've expanded our business and sought direct access to clients, but maintaining simplicity as a core principle is also very important. So, my thoughts can be divided into these three main areas.

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 cross currents in the global economy at the moment. What do you see as any other big risk to your guidance? And maybe what contingency plans do you have in process to address those risks?

I will start with some comments and then my partners can add their thoughts if needed. Overall, we are optimistic about the continuing resolution, considering the current composition of the Senate and the House and how they are likely to work together. Our government relations team has conducted a thorough review, and we feel confident about how things will develop throughout this quarter. We do not anticipate a continuing resolution that will extend well into 2023, and we hope for a resolution by the end of the calendar year. Additionally, we are already observing some momentum in the cyber and intelligence business, related to bids being awarded, as Bob mentioned. We believe that these aspects are reflected in our guidance, and we feel quite positive about the outlook.

Steve and Bob, congratulations.

Thanks, Andy.

So you mentioned you're still targeting double-digit constant currency revenue growth for PA Consulting but I think constant currency Q4 was in the high single digits. Does the recent large contract give you the visibility you need to be confident around constant currency double-digit growth for FY '23 despite U.K. economic concerns? And does margin normalize higher quite significantly impair as revenue ramps up towards that 20% goal that you've given us before? Or should we think about a gradual margin ramp-up from here in PA?

Looking at the ramp-up throughout the year, the significant win contributed to our overall performance but will build gradually over 2023. Its direct impact on 2023 is limited. Our perspective on the U.K. is that we've been somewhat disappointed by the level of productive activity within the government, which has exerted some short-term pressure. However, with the recent budget announcement and improved activity from our clients, we believe that momentum will begin to build as we progress through 2023. We anticipate improvements, and there are no challenges with our backlog and pipeline in PA. While there has been some concern regarding the U.K. government's unpredictability, that issue seems to be resolving itself as we move forward.

To quantify Kevin's last comment, the pipeline growth in PA this quarter was 52% year-on-year. The pipeline continues to grow, and we assess it in the PA world through projects, programs, and engagements that we have already initiated. These are encouraging, along with the programs announced in the budget mentioned by Kevin, as well as other initiatives that PA and Jacobs are currently collaborating on. This reflects a sense of optimism, tempered by some realism considering the challenges faced in the past couple of months.

I just wanted to confirm whether we should still anticipate Divergent Solutions to be broken out as a new segment starting in the first quarter? And perhaps in advance of that, just trying to get a rough expectation as to what that business line is contributing to this initial fiscal '23 outlook maybe from an EBIT perspective?

The business is currently operational, and we will fulfill our commitment to report it as a separate segment in the financials. We are on track to do so. We will provide more detailed commentary as we continue to navigate the accounting processes to ensure that our systems report accurately and that proper controls are established due to the significant change involved. I can share that this will be one of the fastest-growing areas in the company for 2023, and while the margin profile will grow significantly over time, it may be slightly lower in 2023 compared to our expectations at the end of the year. We will offer more details in Q1 regarding this.

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

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

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?

In infrastructure, the opportunities continue to grow, primarily driven in the U.S., but there are also developments internationally. We're focusing on transportation and water, with a growing emphasis on energy transition. The environmental sector remains strong, and the pipeline growth I previously mentioned has been very impressive. Regarding acquisitions, StreetLight Data was our most recent one, and we are already seeing the alignment we expected regarding our data-driven analysis approach. They previously served clients, mainly state Departments of Transportation in the U.S., but our partnerships have expanded this. We're also witnessing increased use of data by private sector firms to inform their capital project investments, which is encouraging news.

I believe you're guiding 2023 growth mid-single digits or high single digits 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? Does it just take longer? Is there momentum that projects are experiencing? Does organic growth profile actually reaccelerate further in 2024? And in 2024, do you get just better operating leverage off that type of growth with higher utilization? How should we kind of think about that as we move forward into 2024?

If you consider the high single digits in constant currency growth, that's quite strong. For instance, Bob mentioned the near 20% growth in the pipeline in the United States. It takes time for that to be realized and translated into revenue. We're dependent on our clients just as much as on ourselves to execute these opportunities, and sometimes they're not as quick to act. However, I believe we're building momentum, and we're being careful in our assumptions about how that will develop throughout 2023.

If I could add, Kevin, while we're focusing on those end markets with a faster burn profile, all three of us discussed the growth in advanced facilities that has driven our expansion. Although the top line figures may reflect the numbers that were mentioned, we indicated that on a constant currency basis, our bottom line growth would be in double digits. Therefore, I believe there is genuine optimism within the portfolio.

Congrats, Steve and Bob.

Thanks.

I wanted to follow up on some of the recent questions. Can you frame recompete exposure in fiscal '23 and maybe even opine on at that CMS and wherever you think it's noteworthy percentage of sales up for rebid? Or if there are any lumpy individual contracts that are up and maybe the timing of those?

I would say that the recompete exposure in 2023 is moderate to low. It mainly involves our CMS business, and we've already received some positive signals regarding a few larger contracts. Overall, I wouldn't consider this a significant exposure for 2023.

The only one we've mentioned at Kennedy is significant, but we feel confident in our position there.

Great. And Bob, congratulations on promotion, Steve yours as well. Kevin, I just thought maybe a question for you. I wanted to understand the fourth quarter results here a little bit clear. I guess your corporate unallocated expense was $28 million. I think you were kind of suggesting it was going to be higher than that for the quarter as well as your guidance for '23 is implying a run rate of about $50 million per quarter. 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 what the nature of that was? Is that like a noncash accounting thing for some hedges that you had in FX? Or was there something else in there that was driving that benefit to the quarter?

No, I don't have the specifics on the FX dynamic, but we can follow up with you on that. Our corporate-related costs, which support operations, are spread worldwide. Therefore, if you have corporate costs in the U.K., they are effectively translated into a lower rate. This reduces the value of those costs and has been beneficial for us since these are all corporate costs rather than corporate revenue. There’s a clear difference between the two. We are aware that the constant currency dynamic remains strong, but we also recognize that reported currency has continued to pose challenges. We are actively taking steps to meet the commitments we established for the company. We pay close attention to this and manage our cost structure proactively during Q4.

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 ones starting to flow through, maybe some offset with pricing moderating, how do you expect, I guess, backlog just to trend over the course of the next 12 to 18 months? I guess is it fair to assume with that extra government funding it could continue to grow? I just want to understand what you have embedded in the guidance that you've provided today?

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

Maybe I could add one more thing, just on what drives backlog which is sales. We've put a tremendous amount. We've been a sales-driven company since inception. I think Dr. Jacobs started that mantra. Our sales-driven growth and the investments we've made, our new Chief Growth Officer as well, has been very, very specific as our portfolio has developed over the most recent period of time. So we're putting the full force effort on our sales effort as the pipeline continues to grow; so timing is good.

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 wonderful Thanksgiving.

Thank you.