Ayan Banerjee:

Thank you. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we will refer during the call. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures and operating metrics. Turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' CEO, Bob Pragada; Special Adviser to the CEO, Kevin Berryman; as well as our new CFO, Venk Nathamuni. Bob will begin by providing an overview of recent activities and then summarizing highlights from our third quarter results. Kevin will provide a more in-depth discussion of our financial metrics. Venk will then provide a review of our balance sheet and cash flow and provide comments around our guidance and Investor Day. Finally, Bob will provide closing remarks and then we will open up the call for your questions. With that, I will turn it over to CEO, Bob Pragada.

Kevin Berryman:

Thank you, Bob. We are pleased with our Q3 results, leading to another solid quarter. Let me begin by summarizing a few of the highlights for the quarter on Slide 8. Third quarter gross revenue grew 1% year-over-year and adjusted net revenue also grew 1%. GAAP operating profit was $260 million for the quarter and included $53 million of amortization from acquired intangibles and $73 million of transaction, restructuring and other costs including $62 million associated with the separation transaction. We now expect our total restructuring costs to be approximately $300 million for the fiscal year, materially driven by higher separation transaction costs associated with our anticipated close now targeted during the second half of September 2024. Our adjusted operating margin was again a strong 11.3%. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.17 per share and included a $0.31 impact related to the amortization charge of acquired intangibles and $0.49 from transaction, restructuring and other related costs, which again were materially driven by the separation transaction. Excluding these items, third quarter adjusted EPS was $1.96, marking an 11% increase compared to the previous year. Q3 adjusted EBITDA was $392 million and was up 11% year-over-year, representing an 11.5% adjusted EBITDA margin. Finally, consolidated backlog was up 6% year-over-year and the revenue book-to-bill ratio was 1.29x with our gross profit and backlog increasing 5.5% year-over-year. Regarding the performance of our lines of business in the quarter, let's turn to Slide 9. Starting with People & Places Solutions. Q3 adjusted net revenue was up 5% year-over-year with adjusted operating profit up 12%. Our mix shift mentioned earlier, resulted in higher margins on lower revenue growth. Adjusted operating margin of 15.3% was up 95 basis points year-over-year. Our backlog grew by 10% year-over-year, while gross profit in backlog grew 9%. This quarter's critical wins underscore our strength in water, environmental and advanced facilities, reinforcing our leadership position in these key markets. These wins translated into a book-to-bill of 1.53x and a record backlog, as previously mentioned by Bob. Moving to Critical Mission Solutions. Our Q3 revenue decreased 3% year-over-year, while backlog was up 4%. Excluding the announced contract loss mentioned in the prior quarter, our revenue would have been up slightly year-over-year. Our adjusted operating profit was up 1.2% year-over-year, while CMS adjusted operating margin rose by approximately 35 basis points year-over-year to 8.7%, the highest margin in 10 quarters as the business continues to drive operational improvements and margin-enhancing client-facing projects. Shifting to Divergent Solutions. Q3 saw an 11% year-over-year dip in adjusted net revenue and a 40% year-over-year decrease in adjusted operating profit, driven by a one-time year-to-date government rate adjustment and the space-based ISR program delays that were mentioned in the prior quarter. Despite the strategic shift in funding with the DoD, we continue to see positive momentum in our space-based ISR technology adoption leading to pipeline build and expected future backlog growth. Now let's turn our attention to PA Consulting. Q3 saw a modest increase in year-over-year revenue. However, PA delivered a strong adjusted operating margin of 21.8%, reflecting a 60 basis point improvement from the previous year. Our margin results this quarter exceeded our expectations and reinforces our confidence in sustaining a strong margin profile as we continue to expect 20% plus margins in Q4. Backlog increased 4% year-over-year, and we expect improved growth as we enter fiscal year 2025. Our adjusted unallocated corporate costs were $61 million in Q3, and we continue to make progress on simplifying and optimizing our operating model to drive costs down. Finally, I am very excited to welcome Venk to the team. We've been working together closely and I -- and we have made great progress on ensuring a smooth transition. With that, I'll turn the call over to Venk.

Bob Pragada:

Thank you, Venk. In closing, we are invigorated as demand for our science-based digitally-enabled solutions remains strong, with clients continuing to select Jacobs to address their most complex challenges. We are exceptionally well positioned to capitalize on the momentum in the critical infrastructure market, and we remain confident in our ability to grow market share and fulfill the needs of our clients across key sectors. Operator, we will now open the call for questions.

Michael Dudas:

Good morning, gentlemen, and welcome. Thanks.

Michael Dudas:

Thank you. Yes. Maybe just first to talk about your improvement in the gross margins in the P&PS backlog that you reported this quarter up 9%. Maybe a characteristic of the mix impact, is there any industries or end markets that have contributed more to that? And I guess as my follow-up, as you're looking towards fiscal 2025 and the pipeline you have and a very strong book-to-bill you had, how confident do you believe that you can show backlog and net revenue organic growth moving ahead into 2025, given where your position is today with your backlog and pipeline?

Michael Dudas:

That's great, Bob. Thanks, sir. Thank you.

Andy Kaplowitz:

Hi, good morning everyone.

Venk Nathamuni:

Good morning.

Bob Pragada:

Yes. Go ahead, Venk.

Andy Kaplowitz:

Very helpful. And then Bob, Venk, or Kevin, you kept the 13.8% plus FY 2025 standalone margin guidance intact for now, but obviously, your People & Places margin has been much higher than expected so far this year. So how do you think about that target at this point? Could there be considerable upside to that target? And then when you think about RemainCo sales, I know you said you expect a pretty good year next year. But any reason why you couldn't expect that sort of 6% to 9% growth for People & Places at least that you've been talking about?

Andy Kaplowitz:

Because you've got a consulting what have you, but how do you think about sort of the visibility toward the core infrastructure growth in 2025?

Venk Nathamuni:

And Andy, if I could, I would say just in terms of just what we see ahead clearly, from a Q4 booking standpoint, there's still some good confidence about the strength of those bookings. But in terms of specifics, we'll obviously provide you fiscal 2025 guidance in the next earnings call. And then we look forward to providing a much more long-term guidance, both in terms of the revenue growth as well as our profitability profile when we have the Investor Day in February. Thank you for your questions.

Steven Fisher:

Thanks. Good morning. I'm not sure if this one would be something you would say for that Investor Day, but really just trying to think about what's the right framework for profit growth year-over-year in P&PS since Bob, you mentioned that you're going to accelerate the profitable growth. I mean, is the framework here any different than sort of the mid- to upper single-digit revenue growth and then some of this margin mix gets you to low double-digit profit growth? Or is something more like mid-teens possible given that you are accelerating these large awards and some of the mix dynamics?

Steven Fisher:

Okay, fair enough. And then just to follow up on the corporate expenses. Just to kind of -- can you just give us an update on how much more clarity you have to the path of hitting the target rate that you have and maybe what the next couple of quarters that you have embedded in there in that trajectory?

Operator:

Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Bob Pragada:

Yes. A couple of comments. Let me start kind of with the U.S. and then work my way around. I'd say in the U.S., the flow of bid activity and pipeline across infrastructure and advanced facility, that hasn't slowed. I'd say the burn rate of some of our U.S. transport work has been a little slower from a burn standpoint, but the level of opportunities have been there. In water, I'd say globally, we have seen some real positive momentum both on bookings as well as burn and that's across all geographies. U.S., Europe to include the UK, Middle East and our Asia Pac and ANZ area. So water has been in that realm as well as advanced facilities really driven by life sciences. So I'd say that just the two areas that we saw as a part of the election in the UK pause was transport. Water kept going in the UK and then the reprioritization in Saudi with regards to some of the event-driven cities oriented work moving more towards the time-based work like the Expo or the airport or infrastructure that's going to be needed with a time element to that in 2026 leading to the Expo and the FIFA World Cup. So these are things that we're continuing to add optimism as we move into Q4 and beyond.

Bob Pragada:

Sure. So as far as again what's driving it, clearly, the aging infrastructure is a big piece. The other piece is around combined sewer overflows and what's happening with regards to climate and some of the natural disasters that we're seeing. So I'd say that's accelerating what's going on as well. In the drinking water component, we are seeing an increase in PFAS -- in addressing the PFAS regulations, specifically in the U.S., but also in Germany and in other locations, too. So that's all kind of driving that. Just to quantify it, Sabahat, our pipeline in the water sector is up nearly 2x as it pertains to this time last year. And we are winning a majority of the work that we're going after, hence, the real attention and focus on the growth.

Andy Wittmann:

Oh, great. Thanks for taking my questions. I guess I just wanted to get a little clarification on the gross profit in backlog. I guess your total backlog was up 6% year-over-year and your gross profit in backlog was up 5.5%. So that suggests that the overall backlog has a little bit lower margin in it. I guess we've established that the P&PS segment margin is up. So I was wondering what the offset and what segments they are? And if you could talk about the mix in those and what occurred there so we can understand the complexion there a little bit better. I think that would be helpful.

Kevin Berryman:

Yes. Look, so what we're seeing is we've been talking about the growth profile in People & Places top line wise and being a little bit more muted because effectively we're seeing more consulting science-based technology, technical and consulting work that's happening. In the backlog and the book-to-bill, very strong book-to-bill is some other types of projects, which include lower margin work, which will, at the same time, create accelerated good top line growth. So it will be a little bit of a reduction in mix relative to the consulting piece versus our current levels. And at the end of the day, it's going to be quite positive because we'll still see, I think, incremental margin over time in People & Places because we've proven our ability to do that. And we're going to see some accelerated growth as well associated with some of these larger, I'm going to call it, projects that involve program management and extended dollars being spent, which will include a little bit greater percentage of pass-through revenue, which has more limited margin than the high-value consulting work that we do.

Andy Wittmann:

Got it. Okay. Yes, that actually makes sense. So, that's helpful. I wanted to also just get an update, Bob, just on some of the actions you're taking in preparation for the split. I know you're looking at how your organization works and where the real cost centers are and the benefit centers are. Can you talk about any things that you've actioned to date that we should know about in terms of how you've changed your business model in anticipation of that forthcoming split, things that you're able to do now before you're able to actually effectuate that deal?

Operator:

Your next question comes from the line of Bert Subin with Stifel. Please go ahead.

Bob Pragada:

Hi, Bert. Good morning.

Bert Subin:

Bob, maybe just to start with you, you had some comments on the advanced facility side. It sounds like life sciences has continued to be really strong, and you mentioned AI data centers, which I feel like is more of like a newer area for you guys in terms of that growing. I didn't hear the semi side. Can you just give some context on sort of what the mix there looks like? I mean, I know Intel reported and said they're taking down their CapEx. So like what the expectation is as we move through into maybe in the 2025 for advanced facilities and how it's performing today?

Bert Subin:

And then in the life sciences…

Venk Nathamuni:

And Bert, if I could, just having most recently come from the semiconductor sector, we do see this as a secular trend in terms of where the manufacturing footprint is and across different realms of semiconductors and logic and memory, as Bob alluded to, and there's also a geographical shift that's happening. So as we look at our portfolio, we have good confidence that we are pretty well diversified. And then just the scope of the opportunities in front of us are still pretty good. Now obviously, any given quarter, it depends on what happens to the market. But I think if you look at it from a secular standpoint, we feel pretty good about our semiconductor footprint.

Bob Pragada:

That's on the existing work, Bert. What we announced goes past that. So we're already on site doing phase 1. What I -- so my comment was around phase 1. Phase 2 is now just starting.

Kevin Berryman:

Okay. So yes, a couple of things. One, when we do the Q4 results, the full year results, I should say, since we're closing in or before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such as well. And all of the business that's included in the perimeter, which will be merged into the Amentum business, that will be basically assets held for sale. So you won't see that information. We have provided you guidance for the full year similar to how we've established it for the full year. So assuming that it closes at the end of the year, all of those numbers that we just quoted would effectively be met. But you're going to actually see a lower number in the results just because some of it is now going to be because it's being put into equity directly as assets held for sale and you're going to be seeing the independent Jacobs. So a lot of clarity we'll be providing to get you an understanding of what that looks like, Bert, when we do report Q4 results, but a lot of moving pieces, but kind of that's a very general view of how you're going to be seeing our financials reported in Q4.

Operator:

Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Bob Pragada:

Sure. Maybe I'll take the first one, Jamie, and then Venk can talk about going forward, what free cash flow conversion looks like. But I think initially, we've got a lot of options. And our primary focus in the quarters that followed the separation is execution and performance and really driving that long-term margin growth profile. We like the positioning that we're in, in each of the end markets as well as geographies that we sit in. So it's not like there is an imperative that we need to do M&A in order to catalyze growth. We've got a great growth trajectory organically. And so proving that out, not even proving it out, executing on the plan that we have right now, we've got a lot of confidence in. Past that period, we've got -- you said it yourself, we've got a great balance sheet and we've got a lot of options, and it's a great place to be. So much more to follow on that. On free cash flow, I'll let Venk talk about that.

Operator:

Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead.

Kevin Berryman:

All of the regulatory approvals on foreign investment and antitrust, all of those kind of things we've already worked through and all has been approved. The only remaining item is the IRS ruling on our private letter ruling that we're looking for, which confirms a view that -- our view that the transaction is tax-free to our shareholders. That's truly what's driving the timing at this point in time. We've been having great discussions with IRS, more to come, but we would expect to get that approval hopefully and over the next month or so. And effectively, that positions for that second half of September close. We've got a lot of things to do with registration for SEC distribution of shares and so on and so forth. But really, the only thing that we were looking for is the IRS ruling, and we feel confident about it.

Bob Pragada:

Thank you.

Chad Dillard:

Hi, good morning guys.

Venk Nathamuni:

Good morning.

Bob Pragada:

Yes. The backlog performance -- the bookings and backlog performance, Chad, has been really, really solid. In fact, the 1.53, we had to go back to see if that was a record in itself. And so we're confident that we're going to be going into 2025 with some really solid growth projections, which we'll be very clear about when we articulate. So that's kind of on the financial and the lagging indicator, the answer is yes. On the leading indicator on the pipeline as well as where we sit in the markets where the pipeline is growing the fastest, water and advanced facilities being highlighted. That also gives us a lot of confidence, too. So short -- a long way of answering your question, the answer is yes.

Bob Pragada:

Yes. So on the -- on our optimism around the P&PS margins and then how that will translate into go-forward margins for the whole company, I think on Slide 11, we did give some guidance on greater than 14.9%. So it probably highlights the optimism that we have on our current reporting structure with regards to that element. And then on Q4, similar to last quarter, Chad, I wouldn't make those comments unless we had already booked work in the first month of the quarter. So I can't quite announce those right now, but you'll see that when we report out on Q4.

Jerry Revich:

Yes, hi. Good morning everyone.

Jerry Revich:

I wanted to ask People -- hi -- the profit growth that you folks have delivered in People & Places over the past five years has been 8% CAGR over the past over the three years, 11% CAGR. So as you folks think about the organic growth opportunity on a more focused Jacobs, can you just expand on that because the growth has already been really attractive in people in places? And so maybe give us a few threads that you'll expand on the Analyst Day on your expectations to continue to drive that level of growth? Or if you think you can accelerate off of that level of really strong performance that the business has delivered.

Jerry Revich:

That's a high bar. All right. And can I ask in terms of just the moving pieces that you spoke about Bob, around the UK election, have you started to see now the best result? Have you seen an acceleration in activity levels? Or what's the history lesson on UK elections and the lag to when we start to see a booking reacceleration for your business?

Operator:

And we have one more question from Louie DiPalma with William Blair. Please go ahead.

Bob Pragada:

Sure. Louie, thanks for the question. IIJA, I think these are industry numbers. So 60% appropriated, 30% spent. So yes, there are -- there is work that continues to flow. Right now, I think that the hurdle is 2026. I said it before, that's probably going to continue to go past 2026 as we discussions about a second IIJA, which we'll see where that goes within the congressional floor. But we are -- it is driving that backlog performance and our conversion rate on that as well. I will say this is that on the CHIPS Act -- I'm sorry, one more comment on IIJA. IIJA, the grant money you can see, and that's some of the work that we're seeing that's just in transport, but in water as well. CHIPS Act, those jobs that have received CHIPS Act money, we've been involved with those. Remember, those were pretty much designed and already in the field and then received the funds. Just kind of next wave, we're on the front end of. And so I think that CHIPS Act money will continue to flow and represent a nice tailwind for us.

Bob Pragada:

All right. Thank you, operator. Thank you, everyone, for joining the earnings call. We look forward to providing further updates and visiting with investors and analysts in the months to come. Exciting times ahead and look forward to staying very open and transparent with the market as we move forward. Thank you.

Ayan Banerjee:

Thank you. Good morning. Our earnings announcement was filed this morning and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and Interim CFO, Kevin Berryman. Bob will begin by providing an overview of recent activities, then summarizing highlights from our second quarter results. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. With that, I'll turn it over to CEO, Bob Pragada.

Kevin Berryman:

Thank you, Bob. We are pleased with our Q2 results, leading to another strong quarter. We are steadfast in our commitment to providing high-value solutions with improved margins, supported by our continued emphasis on operational excellence and execution. So, let me begin by summarizing a few of the highlights for the quarter on Slide 7. Second quarter gross revenue grew 5% year-over-year and adjusted net revenue grew 3%. GAAP operating profit was $281 million for the quarter and included $53 million of amortization from acquired intangibles and $58 million of transaction, restructuring, and other costs, including $47 million associated with the separation transaction. We still expect our total restructuring cost to be approximately $275 million for the fiscal year, materially driven by the separation transaction. Our adjusted operating margin was 11.3%. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.29 per share and included a $0.28 impact related to the amortization charge of acquired intangibles and $0.34 from transaction, restructuring, and other related costs, all of which were materially driven by the separation transaction. Excluding these items, second quarter adjusted EPS was $1.91, marking a 7% decrease compared to the previous year. When adjusting for last year's second quarter discrete tax benefit of $0.32, our current non-GAAP EPS represents an approximately 10% year-over-year increase. Looking forward, we anticipate maintaining an annual effective tax rate of 22% for the full fiscal year. Q2 adjusted EBITDA was $393 million and was up 10% year-over-year, representing a strong 11.3% adjusted net revenue. Finally, backlog was up 2% year-over-year. The revenue book-to-bill ratio was 0.96 times with our gross profit and backlog increasing 4% year-over-year. Excluding a one-time change in government funding strategy with regard to Space ISR programs, which I'll describe in more detail during my segment comments, our book-to-bill ratio for the quarter would have been approximately 1.06 times, with significant strength in pipeline growth and expected large wins in Q3 and Q4. Regarding the performance of our lines of business in the quarter, let's turn to Slide 8. We are particularly pleased with our performance in People & Places Solutions. Q2 adjusted net revenue was up 5.6% year-over-year. Adjusted operating profit growth was strong at 15.3%. Reflecting our commitment to higher end profitable growth, the segment saw a record adjusted operating margin of 15.3%, up approximately 130 basis points year-over-year. We continue to see solid momentum in both growth and profitability in the business. Our backlog has grown by 2% year-over-year and we've seen a 7% increase in the gross profit in our backlog. This improvement reflects our ongoing efforts to enhance the quality of our bids and project wins as we expect some critical large wins to occur in Q3. Moving to Critical Mission Solutions. Our Q2 revenue increased 3.2% year-over-year with backlog up 3.9%. Our adjusted operating profit was up 10.3% year-over-year, while CMS adjusted operating margin rose by approximately 50 basis points year-over-year as the business continued to find avenues of operational improvements. While a recent program loss will put some short-term pressure on the second half, our recent successes in shorter-cycle awards is expected to help mitigate the impact. Our work remains mission-critical, allowing the business to show long-term resilience against shifts in government funding and program adjustments. Let's now focus on Divergent Solutions. During Q2, we observed an 11% year-over-year decrease in adjusted net revenue and 24% decrease year-over-year in adjusted operating profit. Excluding a one-time Palantir license in the previous period, adjusted operating profit would have been up 13% year-over-year. While backlog was negatively impacted by a change in funding strategy with the DoD on space-based ISR programs, we are encouraged by the positive momentum in near-term sales, which we believe will contribute to our ongoing success. Now, let's turn our attention to PA Consulting. Q2 saw a slight decline of 2% in year-over-year revenue, driven by a continued challenging macro environment in the consulting industry and a solid year ago comparable. However, cost and execution discipline helped deliver a strong adjusted operating margin of 20.5%, a 270 basis point increase from the previous sequential quarter. As we emphasized during our last earnings call, our industry position is uniquely differentiated and our work is both purposeful and critical. As a result, PA continues to deliver ongoing positive momentum in bookings and pipeline growth. We remain confident in our ability to deliver strong adjusted operating profit margins, targeting above 20% for the second half of the year. Our adjusted unallocated corporate costs were $59 million in Q2. We continue to make progress on simplifying and optimizing our operating model and driving costs down. We expect this line item post separation to trend towards $50 million per quarter or $200 million annually. Turning to Slide 9 to discuss our balance sheet and cash flow. After delivering a strong free cash flow in Q1, our quarterly free cash flow was negative $71 million in Q2 as working capital increased the planned levels from the exceptional performance in Q1. Despite this impact in the second quarter, our reported free cash flow conversion for the first half of the year has remained at approximately 100%. And as a result, we are well-positioned to deliver on our forecast, maintaining 100% reported as well as adjusted free cash flow conversion for the full year. Regarding capital allocation, we opportunistically repurchased $95 million of shares during the quarter, reflecting our commitment to delivering consistent return of capital to our shareholders. We still have $679 million remaining under our current repurchase authorization. And as we have said, we will remain dedicated to returning capital to shareholders, while remaining committed to maintaining an investment-grade credit profile. We ended the quarter with cash of $1 billion and gross debt of $3 billion. Our Q2 net debt to adjusted EBITDA of approximately 1.3 times remains a clear indication of the continued strength of our balance sheet. Given the strength of the balance sheet, we feel comfortable with a portion of our debt having become current in Q2. We have ample options

Operator:

Thank you. We will begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Robert Pragada:

Hi, good morning Andy.

Andy Kaplowitz:

Bob or Kevin, can you give us more color into what's going on with Jacobs' backlog and how to think about it going forward? I know that you said backlog in People & Places is up about 2% year-over-year, but can you elaborate a bit more on the larger prospects you're talking about for Q3? Do you see a nice acceleration in backlog growth in the second half in People & Places? And then maybe just a change in the space-based ISR impacting Divergent, that business is going with CMS, the deal or correct, but could you give us some more color on what happened there?

Kevin Berryman:

Yes. Look, I think the dynamics associated with Divergent and you're right, that part of the business is going to be part of the separation, so it's in the parameter of the separation transaction, Andy. And look, there was a change in funding strategy, whereby the technology and associated projects that we have are still considered viable and probably the best technologies to be utilizing going forward, but because of deciding how they were going to be funding it, DoD is handing over that responsibility to the intelligence community. So, while long-term, we have a reduction -- well, short-term, we have a reduction in our backlog because the DoD is handing that over, we're starting to, right now, see immediate build back up in some of those projects being now embedded into the intelligence community. While it represents certainly a delay in some of the burn of that project, our expectation is longer term, that DVS will start to see that same backlog come back into their kind of backlog over the course of the next year-plus, and consequently, we'll have to build up the burn once again. And so if you think about those two dynamics, I think those are kind of short-term dynamics when you include People & Places. And when you see the outlook for the rest of the year, we're feeling pretty good about our backlog growth and book-to-bill over the balance of the year.

Robert Pragada:

Yes. So, on the first part, that allocation hasn't changed since we talked about it last quarter, so that's remained consistent. And we're not going to change that philosophy. Really, this quarter, the mix that we saw specifically around Water and Life Sciences, when we think about it, those are two segments, Andy, that are growing at double-digit rates. And from a pipeline standpoint, I mean, both are nearly -- the pipelines are doubling on a year-on-year basis. So, that mix of higher-margin work that's coming in is really driving that growth.

Kevin Berryman:

Thanks Andy.

Judah Aronovitz:

Hi, thanks for taking the question. Calling in for Steve Fisher. First question is, what has changed in the background in the second half that drove your guidance change?

Kevin Berryman:

Sorry, didn't follow the question.

Kevin Berryman:

No. Look, I think at the end of the day, we feel as if we're being prudent in our guidance, and it still represents a 13% year-over-year kind of increase in EPS. So, I think at the end, we're sitting here saying, that's a good ending result. We're being prudent in the establishment of that. And of course, it's offsetting some of the things that we know are already in our numbers, the inventory write-offs that we had in the first quarter. So, I think it's quite actually a positive.

Robert Pragada:

Yes. Project selectivity is -- we've always had that. And that has become kind of a primary focus for us as the opportunities have increased. Talk a little bit about Water and Life Sciences, in our Transportation business right now, our win rates have been the highest, you could say, in the highest in the market. And they've been the highest that we've experienced, and a lot of that comes from because it's subjective evaluation from what we put our effort and our money behind on trending. Probably the biggest component of that is around long-term client relationships. We're not out looking for work. We've been with our clients for decades. And if you think about 3,700 clients around the world and over the course of the last 20 years, that's a 2% client turnover. And so when we're with a client, we're there for the long-term.

Michael Dudas:

Good morning Bob and Kevin, and welcome back as well.

Kevin Berryman:

Thanks Mike.

Robert Pragada:

Sure. So maybe I'll start with in sciences and then talk about semi kind of the electronics world right now. I mentioned this before, Mike, within our life sciences world, you've heard a lot about GLP-1 and everything is going around the obesity drug. If you look at the two biggest ones that are in that space, our work that we do for them represents nearly over 50% of the capital that they put in place. So that work continues to be a big driver. But what's also happening is two other dynamics. One is around oncology. There are quite a few advances that are happening around oncology. And so timing on those was maybe a little slower than we wanted over the course of the last few quarters. But going into the second half, those jobs are right in front of us, and we're well positioned for those. The last dynamic around Life Sciences is just sheer capacity. Here, the CEOs of life sciences companies and biotech companies talk about capacity as the biggest choke point. The contract manufacturing world is on the rise as well. So we'll have some good news here in the second half and actually in Q3 around what's going on in that contract manufacturing space. Semiconductor, a lot of stuff in the news right now about the ubiquitous world of chip manufacturing and how AI is driving not just chip manufacturing but also data centers. We're seeing that. The chips money has now been delivered to the market, and some of the largest players have benefited from that. So we're seeing projects that we've already been involved with talk about Phase 2 of those. And so we'll have more to say as those become public in the second half, but it's really the entirety of the ecosystem of the chip manufacturing and semiconductor world. Starting from the R&D facility through manufacturing and now you'll hear a lot more about test and assembly and those test and assembly facilities coming to the US. So, we're excited about what's going on. And then in data centers, the power usage of these are creating opportunities for us with regards to power and cooling, the water requirements on now what could be 1 gigawatt data center. So, really, really positive story there.

Robert Pragada:

Yes. Maybe I'll make a couple of comments on the opportunities and on backlog, and then Kevin can talk about the margins. What gets embedded in is the PA backlog was actually up 8% year-over-year. And so we're starting to see that momentum of those opportunities and those collaborative opportunities come through. So that's exciting news there. And a lot around the U.K. macro has been driving the business with at least hopefully some clarity that there'll be an election in the U.K. in the second half of the year, we're already starting to see the pipeline grow in the sales performance in the last month of the quarter kind of drove the business. So, the momentum is there. And then given we're talking about the margin.

Michael Dudas:

Thank you, gentlemen.

Jamie Cook:

Hi. Good morning. A couple of questions. One on people in places, the margins implied in the back half of the year, Kevin, I think, are down relative to where we were in the second quarter. I know you spoke to mix. But with backlog -- with gross margins and backlog being up, I'm just wondering what's going on there? Or is there just some level of conservatism in your margin guidance? And then my second question, just on the large awards that you're expecting in the back half of the year. I'm assuming that you don't need any of these awards to make your guide for 2024. So I guess I'll start with those. Thank you.

Robert Pragada:

And then on the awards, Jamie, those are -- when I say are they part of the guide or not part of the guide, our guide incorporates the probability waiting for the award. But we're feeling optimistic about not just the award anticipated awards, but the pipeline. The pipeline is looking extremely robust in PPS.

Operator:

Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead.

Robert Pragada:

Sure. So maybe I'll just talk about broadly Saudi and then specifically on NEOM. Broadly, Saudi, the pipeline of work continues. And it's -- for us, it's a diverse pipeline. We don't index towards a specific type of offering. We've got value-added services that we provide to the entire life cycle of these programs. And if you look at the pipeline, the infrastructure component of it, the transportation, whether it be in aviation or in rail as well as the water opportunities that we've had have been pretty robust. So, we just announced a major expansion of the Riyadh, the new Riyadh airport that's going on that's in full force as well as the water infrastructure that we're putting in place. Our exposure on NEOM, even with the pullback on NEOM as far as the 170 kilometers, the work that's going on right now has not ours has not abated and continues to go on schedule for not just the personal canal that we're dedicating towards the job, but the growth that we see in the job as well.

Robert Pragada:

Sure. So, overall, solid -- the work that we're seeing both in Southeast Asia, in Australia, New Zealand and in Europe. And Europe, clearly driven by the geopolitical kind of impact that it's had on energy transition that continues. The interconnectors that we are, not just in the middle of in Europe, but the additional pursuits that we have in place kind of put some tailwinds there. I'd say in the US, it's been not just a market on its own, but it's also been an enabling market, our expertise around renewables and then taking that energy expertise in taking it to areas such as data centers and the EV ecosystem with regards to transportation. That's probably been a greater level of focus in the U.S. So kind of the diversity of our skill sets is really helping that energy and power group that we have. Again, it started off from a smaller base, but it's doubled in size just in the year.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.

Robert Pragada:

Hi, good morning, Chad.

Chad Dillard:

So, in your prepared remarks, you talked about the PFAS legislation that was just handed down. Just trying to get a sense for how to think about timing for potential awards in your backlog, like what's the design cycle for that? And then can you also talk about how Jacobs is positioned to win there?

Chad Dillard:

That's helpful. And then just over on the infrastructure side, specifically on transportation. Can you talk about like how your pipeline is evolving? How's it changed this quarter versus maybe a year ago? Any color on that would be helpful.

Chad Dillard:

Okay. Thank you.

Justin Hauke:

Yes. Good morning. Thanks for taking my question. I just -- I wanted to clarify one thing on the guidance. The CMS outlook for the back half of the year, I think previously you guys were talking about kind of a mid-single-digit constant currency growth rate. It's a little bit below in the first half, but I think you were talking about some program losses that are going to pressure the second half. And so I just wanted to make sure that we understood kind of what that commentary meant and what your expectations are for the revenue growth in the back half of the year at CMS?

Robert Pragada:

And maybe just one thing to add. The operational efficiencies that the team has really delivered through that double-digit bottom-line growth for this quarter, and we mentioned it last quarter as well, with operating margins that are now the highest that we've seen in the business is another real highlight for what we're doing within CMS.

Justin Hauke:

Okay. Thank you for clarifying. And I guess my second one is just to ask on the corporate unallocated costs. The trending down to the $50 million, you're not expecting that line item to come down until post separation though, right? So, this kind of $58 million that you've had the last two quarters, that's kind of the run rate for the balance of the year. And then with the spin, that's when you would expect like the step function change in the first quarter of 25%. Is that still the right way to kind of think about it?

Justin Hauke:

Okay. Great. Thank you very much. Appreciate it.

Operator:

Your next question comes from the line of Bert Subin with Stifel. Please go ahead.

Robert Pragada:

Hi. Good morning.

Sahej Singh:

It seems like a lot of good questions have been asked. So I will ask about IIJA ramp. I think we've heard commentary more broadly from the industry and then even for you guys of an expectation of IIJA funding ramp to around 2026 or 2027. Are you still seeing that trend? Are you seeing that trend faster than expected? Any color there would be helpful.

Sahej Singh:

That's helpful. Thank you. And then maybe a follow-up on the prior question related to unallocated expenses. You've given good visibility into the post spin. I think I look at it as I was quickly doing the math, you're trending at about 2% on a trailing 12-month sales, so maybe on a percentage basis trailing 12-month post spin, where are you looking to get? I think it's been elevated post your PA Consulting acquisition in 2021?

Sahej Singh:

Thank you. And then just last one for me is you mentioned the Riyadh airport. I think I saw some news flow on Dubai potentially expanding their airport. Is that a project that you guys are actively interested in pursuing on our in conversations around? Any color there would be incrementally helpful as a tailwind into the Middle East region more specifically?

Sahej Singh:

Okay. Thank you so much.

Jerry Revich:

Yes. Hi. Good morning everyone.

Jerry Revich :

Bob, I'm wondering if you could just talk about the data center opportunity for you folks. What does the scope of CapEx looks like for data centers for you folks compared to semi-cap equipment and your market share when we last spoke, the outlook for data center CapEx was, I don't know, probably 30% lower. So, I'm wondering, as you think about the outlook for advanced facilities could growth actually accelerate if your content on data centers is remotely similar to what it is for the semi-cap equipment? Thanks.

Jerry Revich:

And in terms of within People & Places, really good top line growth and you mentioned there's some bookings coming up. Can you just calibrate us which of your end markets were the biggest drivers of growth in the quarter and based on what's in backlog and bookings, which end markets do you expect to be above segment average growth over the next couple of quarters?

Jerry Revich:

Thank you.

Josh Sullivan:

Hey, good morning.

Josh Sullivan:

Can you just comment maybe on labor availability, inflation retention on a geographic basis? Where is it still hot? Or is it getting a little better?

Josh Sullivan:

Got it. And then just on the short-cycle wins you mentioned in the comments there, where specifically were those? Any structural shift in focus or is that just opportunistic?

Josh Sullivan:

Got it. Thank you for the time.

Robert Pragada:

Thank you, everyone, for joining our earnings call. We really look forward to providing further updates and visiting with all of you and investors and analysts in the months to come, and look forward to engaging first hand. Thank you, everyone.

Jonathan Evans:

Thank you, Audra. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures and operating metrics. We have also introduced a new supplement that consolidates certain information, including our non-GAAP financial tables. Additionally, beginning with this quarter, the company will no longer apply an adjustment to adjusted net earnings from continuing operations and adjusted EPS, which previously resulted in the application of the expected annual tax rate to all quarterly periods. Prior comparable periods are also being presented on this basis. Turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and CFO, Claudia Jaramillo. Bob will begin by providing an overview of recent activities and summarizing highlights from our first quarter results. Claudia will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. With that, I'll turn it over to CEO, Bob Pragada.

Claudia Jaramillo:

Thank you, Bob. We are pleased with our Q1 results, which came in above our expectations. Our results illustrate our ability to deliver on our long-standing financial objectives, while at the same time, generating strong free cash flow and returning a significant portion of our cash to shareholders. So let me begin by summarizing a few of the highlights for the quarter on Slide 7. First quarter gross revenue grew 9.5% year-over-year and adjusted net revenue grew 7%. GAAP operating profit was $204 million for the quarter and included $51 million of amortization for acquired intangibles and $60 million of other transaction, separation related restructuring and other costs. This includes $51 million associated with the separation of CMS. Our adjusted operating margin was 9.8%. I'll discuss the underlying dynamics during the reported segment review. GAAP EPS from continuing operations was $1.37 per share. And included a $0.27 impact related to the amortization charge of acquired intangibles and $0.37 from transaction, restructuring and other related costs. Excluding these items, first quarter adjusted EPS was $2.02, up 28% year-over-year. Our adjusted EPS included a $0.49 benefit related to a discrete tax item and a $0.09 headwind related to the noncash inventory write-down. Q1 adjusted EBITDA was $328 million and was down 3.1% year-over-year, representing 10% of our adjusted net working capital. Excluding the inventory write-down, adjusted EBITDA would be roughly flat year-over-year. The effective tax rate of 4.2% benefited from $61.6 million in discrete tax benefits related to the permanent reinvestment of capital gains associated with an overseas subsidiary. This tax benefit was incorporated in our annual guidance and we continue to forecast the 22% annual effective tax rate to fiscal year 2024. We will no longer be adjusting our non-GAAP EPS to align with our full year effective tax rate expectations. With the entirety of the deferred tax benefit in Q1, we now expect quarterly effective tax rate to approximate 26% to 27% for each quarter of the remainder of the fiscal year. Finally, backlog was up 5% year-over-year. The revenue book-to-bill ratio was just over 1.12x, with our gross profit in backlog increasing 6.1% year-over-year. Regarding the performance of our [indiscernible] in the quarter, let's turn to Slide 8. Starting with People & Places Solutions. Q1 adjusted net revenue was up 8.4% year-over-year. Adjusted operating profit was down slightly, resulting in adjusted operating margins of 13.7%. However, excluding the impact of cost allocation changes previously mentioned, adjusted operating profit would have resulted in approximately 7% year-over-year growth. We continue to see solid momentum in both growth and profitability in the business and anticipate full year P&PS adjusted operating margins to increase year-over-year, inclusive of the previously mentioned increase in allocation of overhead costs. Moving to Critical Mission Solutions. Our Q1 revenue increased 5% year-over-year with backlog up 9%, continuing a consistent trend of high-single-digit growth over multiple quarters. We also continue to find avenues through operational improvement with CMS operating margins rising by 63 basis points year-over-year. Shifting to Divergent Solutions. In Q1, our adjusted net revenue increased by 4.7% year-over-year. Underlying execution was strong. Adjusted operating profit was $8 million, including the $15 million inventory write-down. Excluding the one-off write-down, performance was above expectations. Now let's turn our attention to PA Consulting. Q1 saw an 8.5% year-over-year revenue increase. PA continues to deliver ongoing positive momentum in bookings and pipeline. However, the U.K.'s ongoing election cycle introduces macro risks that we are closely monitoring. We remain confident in our ability to navigate these factors by managing variable costs and are targeting approximately 20% adjusted operating margins for the full year. In total, it was a strong quarter for each of our segments from an execution standpoint. Our adjusted unallocated corporate costs were $59 million in Q1. This quarter's cost excluded previously mentioned costs that are now being allocated to the P&PS segment. As we continue to enhance operational efficiencies and optimize our operating model, we expect this line item to trend towards $50 million per quarter or $200 million annually post debt pressure. Turning to Slide 9 to discuss our balance sheet and cash flow. We posted another quarter of strong cash flow generation, which is indicative of the quality of our earnings and cash conversion. As Bob mentioned, we generated strong quarterly free cash flow of $401 million. As a result, we are well positioned to deliver our anticipated 100% reported and adjusted free cash flow conversion to adjusted net earnings. Regarding capital allocation, we opportunistically repurchased $100 million of shares during the quarter, reflecting our commitment to delivering consistent returns to our shareholders. We still have $775 million remaining under last year's repurchase authorization. And as we have said, we will remain dedicated to returning capital to shareholders in aligning with our overarching goal of compounding free cash flow per share. We remain committed to maintaining an investment-grade credit profile. We ended the quarter with cash of $1.14 billion and gross debt of $2.9 billion. Our Q1 net debt to adjusted EBITDA of approximately 1.2x is a clear indication of the continued strength of our balance sheet. As of the end of Q1, approximately 35% of our debt is tied to floating rate debt, and our weighted average interest rate was approximately 5.1%. Finally, with our strong balance sheet and free cash flow, we remain committed to our quarterly dividend. The Board has authorized an 11.5% increase to $0.29 per quarter, and our quarterly dividend will be paid on March 22. With this, we have increased our dividends each year since 2018, driving a nearly 12% dividend CAGR over that period. Now I will turn it back to Bob.

Operator:

[Operator Instructions]. We'll go first to Andy Wittmann at Baird.

Robert Pragada:

Yes, Andy, it's a great question. It's actually a nice lead-in. So your assessment of that recoverability is correct. And if you just kind of just moment -- for a moment, kind of pre planning for the separation and outpost. Pre, we had a lot of shared costs. And so the direct applicability through the segment was not as clear. And since we started this, we had a great opportunity to now have direct line of sight to where these are being applied. Hit it right in the beginning of the audit cycle, the government audit cycle in Q1 and now have the full year of applying those costs. So that's -- that's correct. Now on the full year amount, it would be the $17 million that we identified this year -- I'm sorry, this quarter multiplied by 4. But remember, over each quarter that goes down because of the recoverability effect. Did that make sense?

Robert Pragada:

That's correct.

Robert Pragada:

No. No, the $9 million of transition costs took it to $59 million and then the $17 million that we were able to, from a positive standpoint, move into P&PS and get recoverability on it was it. I will say, Andy, we are making progress on kind of our overall cost optimization or reductions that we started at the beginning of the year, to where we'll be right on plan of what we identified last quarter.

Michael Dudas:

Maybe you can share a little bit more on PP&S relative to the pipeline as it stands today. You talked a little bit in your prepared remarks about margin improvement in backlog. How does that track as we go through fiscal year 2024? Is the -- are you getting better share on higher-margin projects, maybe early consulting advisory relative to design work in some of these projects? And what areas do you anticipate some of the better revenue and booking growth in the P&PS segment as we move through '24?

Michael Dudas:

Perfect. And what about for bookings and outlook as we move through 2024? Are those the areas you concentrated or are there other areas, given life science, [indiscernible] et cetera?

Operator:

We'll move to our next question from Andrew Kaplowitz at Citigroup.

Robert Pragada:

Yes, I'd say the answer to the last part, Andy, is yes. And from a margin -- from a P&L margin perspective, we feel comfortable that our year-on-year increase that I mentioned in the script, is real. And so year-on-year margin increased year-on-year. If there were areas where I'd say soft might be too strong, but if there are areas that we've got a high level of attention on, it is the U.K. We've been able to stay flat in the U.K., which is a positive. But we did have the national infrastructure and construction report just published here, I think it was Friday. And the U.K. government committing to the same level of spend, GBP 775 billion over the course of the next 10 years, with some consideration for inflation. So that's an area that we're continuing to put some attention on to make sure that we continue to grow, but overall positive.

Robert Pragada:

Yes. So let me just clarify one thing, Andy. The inventory write-down has to do with the Cyber & Intelligence business, and that actually is in the perimeter and will be going. And it's really a part of the separation financials and inventory that we had to disposition. So that's not in the piece that will continue with independent Jacobs. . We see more of it and we're working on this operating model right now. Transportation, water and what we're doing in the built environment around digital enablement, being a strong horizontal cross cutter through now the entirety of the business. So simplifying our reporting as well as taking all the successes that we had within the transportation and water digitization and digital enablement. And integrating them into now what will be independent Jacobs. And so much more to follow on that.

Steven Fisher:

Bob, you mentioned that you're on track with the cost expectations you identified at the beginning of the year. So does that mean the $40 million of temporary costs and $275 million of restructuring are still the numbers to keep in mind. And if so, how much of that has been incurred to date? Is that the $17 million plus the $9 million? Or should the $40 million be lower now that you're going to be getting reimbursed for some of that.

Claudia Jaramillo:

And Steve, I'll add to the $275 million, we're also on track. And for that, it's a $51 million that I mentioned in my prepared remarks.

Robert Pragada:

Yes. Steve, the answer to the first question is yes. And I'd say within the next few quarters.

Robert Pragada:

No, no, no, no. It will sequentially increase over the next few quarters to where Q4 will be above where we were last year.

Robert Pragada:

For the year. Yes.

Robert Pragada:

For this year. This year will be higher than the last year, year-on-year total.

Robert Pragada:

Better than 14.6%. So last year was 14.6%. And then this year will be better than 14.6% full year.

Claudia Jaramillo:

It will be a gradual increase.

Operator:

We'll take our next question from Jerry Revich at Goldman Sachs.

Robert Pragada:

Sure. So what drives -- I'm going to answer the second part first, Adam. The pipeline as well as the -- we call it stock of work in PA, but its backlog, is driving the optimism there as well as the team really does have better arms around the variable cost structure of the entity. Similar to Jacobs, it's a people business, asset-light and services-oriented. The drop was probably driven a little bit by some volatility with our clients in December. And the discretionary spend of -- and it was kind of more in the U.K. business and around what was going on within U.K. government, defense and security as well as the public sector work. And so that was -- that kind of -- if it stops on a dime, we can't make those variable cost actions. And so we ended up seeing that in the quarter. That has since kind of returned and then we're managing our variable costs ahead of it, similar to what we did in mid last year.

Robert Pragada:

Yes. I think we're still in that kind of mid-single digits to mid-high singles. [indiscernible] for 3 years. 3 years has been double-digit growth. And so we're still growing. I think we're probably kind of in that mid-single-digit growth now.

Charles Dillard:

So I wanted to spend a little more time on just like what you're seeing from a booking standpoint, in People & Places. So first place is just like on the semiconductor side. So it sounds like there's a number of grants to be announced by the U.S. in March. To what extent do you think that could potentially unlock with more activity from a design standpoint. And then just like what are you seeing from like a domestic versus international perspective, just for semi design?

Charles Dillard:

Got it. That's super helpful. And then just going back to the cost reallocation from [indiscernible] allocated to People & Places. Just wanted to get a sense for like how long it will take before you actually can hit the P&L. Do you have to go through like a full bid cycle. So in other words, do you have to like fully turn over the backlog before you see those benefits?

Operator:

We'll go next to Sabahat Khan at RBC.

Robert Pragada:

Sure. I'd say that, so the 2 areas within PA that we're getting 1 actually is kind of ubiquitous in today's world as well as within the PA world. And then I'll go to an end market sector, is the use of AI and AI enablement in our clients' business as a driver of business transformation. And so to kind of toggle here, it's good for PA, it's good for Jacobs, in that the AI enablement is the start of the conversation. I think some clients now this kind of goes to how quickly does that get into an engagement, get into backlog, we realize in P&L. That's kind of where we are right now as far as where we are in the cycle. So AI is a big driver. But the timing and speed of how our clients are embracing it is driving some of the booking cycle. The second from an end market standpoint is Life Sciences. And so PA has been able to take not just AI, but other knowledge and look at the transformation of the whole clinical study program, especially as that's kind of gotten more patient-centric with different types of therapies for each patient. PA has rightly been right in the middle of all of that. And so that kind of got a tail on it as well. And then the last one that is really kind of starting to develop in our pipeline at PA is around the use of AI in early-stage drug discovery piece, and it's real, real early stage. I mean clearly, the Tier 1s are way out ahead. But PA does it from more of a standpoint of how that's going to transform kind of the Tier 2 and Tier 3 clients. So some good stuff. I'd say this the timing right now of how quickly those get embraced while clients are thinking about their own business is causing some of that near-term softness.

Robert Pragada:

Sure. Yes, I'd say that, that guidance that we've been pretty true to and I kind of -- I mentioned a statistic there that 6% to 9% or mid- to high-single-digit growth and for the last 5 quarters, we've been right there on the high end of that range is where we're seeing the IIJA component of that is we just saw some statistics that we're -- from a time line standpoint, halfway through, but on some of the larger rail and highway specifically, we're 25% outlaid -- 15% obligated and 25% outlaid on the actual money. So it hasn't been a big piece of the growth. But the positive news is that it looks like that 5-year cycle is definitely going to get extended.

Bert Subin:

Bob, just to follow up on that point. If we look beyond '24 and maybe into '25 and past that, it sounds like your visibility is generally improving not just in advanced facilities but in large parts of P&PS. As you think about potentially toggling you're above what your medium-term view is for the segment, what would drive that? Is that more a function of winning some specific larger projects? Or is it the flow of funding under some of these programs?

Bert Subin:

No. I think inclusive of, I guess, from what you were saying, Bob, in your earlier comments, it sounds like you feel like you're more on that upslope and you're seeing sort of the path of some of that CapEx will be beneficial for you. So including that and thinking about what you just mentioned about IIJA and some of the other programs, it seems like your visibility is quite good. If you were to say, several years from now, look at you and you were growing at 9% or faster than your 6% to 9% growth range. I'm just curious if that's more a function of winning some of those larger projects that are out there? Or is it just the funding needs to flow sort of on time?

Bert Subin:

Got it. Okay. That's super helpful. Maybe just a cost side question. If we look at that bridge that you guys put in the deck going from 10.8% to 13.8%, can you just help us think through how much of that is cost cutting related and how much of that is just improved mix? Sounds like you're pretty bullish on the margin opportunity in P&PS. So is that a function of just you're getting better projects? Or is it more cost cutting? Or is it sort of 50-50?

Operator:

And there are no further questions at this time. I would like to turn the conference over to Bob Pragada for closing remarks.

Operator:

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Jonathan Evans:

Thank you, good morning. Our earnings announcement was filed this morning and we have posted a slide presentation on our website, which we'll reference during the call. Our 10-K will be filed later today. I would like to refer you to slide two of the presentation material for information about our forward-looking statements and non-GAAP financial measures. Turning to the agenda on slide three. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and CFO, Claudia Jaramillo. Bob will begin by providing an overview of recent activities, then summarizing highlights from our fourth quarter results. Claudia will provide a more in-depth discussion of our financial metrics, as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks and then we'll open up the call for questions. With that, I'll turn it over to our CEO, Bob Pragada.

Claudia Jaramillo:

Thank you, Bob. Turning to slide 11 for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 10.5% year-over-year and adjusted net revenue grew 8.9%. GAAP operating profit was $278 million for the quarter and included $52 million of amortization from acquired intangibles, $43 million of other transaction separated-related and restructuring costs, and $11 million non-cash charge related to decreasing our real-estate footprint. The other transaction separation-related and restructuring cost of $43 million are primarily related to advisory and other costs associated with the separation of CMS. As we go forward, our costs will now include expenses to be incurred in connection with the separation. Looking to fiscal year 2024, we expect to incur approximately $275 million in one-time costs related to the separation and associated cost optimization actions. These costs are largely unavoidable in a separation and transaction of this size, but I want to reiterate that post-separation, it will be a key focus of ours to minimize one-time adjustments inclusive of restructuring costs. Our adjusted operating margin was 11%, up 14 basis points year-over-year. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.25 per share, and included a $0.27 impact related to the amortization charge of acquired intangibles, $0.23 from transaction, restructuring, and other-related costs, a $0.05 non-cash impairment charge related to reducing our real-estate footprint, and a $0.10 adjustment to align to our annual adjusted effective tax rate. I refer you to slide 30 for more details on these adjustments. Excluding these items, fourth-quarter adjusted EPS was $1.90, up 6% year-over-year. Q4 adjusted EBITDA was $384 million and was up 10% year-over-year, representing 11.1% of adjusted net revenue. The company's U.S. GAAP effective tax rate for continuing operations is 21% for the fiscal year 2023. Our U.S. GAAP and adjusted effective tax rate for the quarter and year include certain tax charges for deferred tax valuation allowances and audit assessments. In the fourth quarter, this amounts to an EPS impact of $0.06 per share, and as a result, fiscal year 2023 adjusted earnings per share from continuing operations reflects a 21.6% adjusted effective tax rate. Finally, backlog was up 4% year-over-year. The revenue book-to-bill ratio was just over 1 times with our gross profit and backlog increasing 8% year-over-year. Moving to slide 12 for a brief recap of our full-year 2023 performance. Fiscal year gross revenue grew 10% year-over-year and net revenue grew 7%. GAAP operating profit was $1.1 billion up significantly year-over-year, driven primarily by strong growth in gross profit while holding G&A relatively flat. GAAP EPS was $5.31 and adjusted EPS was $7.20, up 7% and 4% year-over-year, respectively. Adjusted operating profit grew 9%, and was up 11% on a constant-currency basis. Both revenue and adjusted operating profit increased year-over-year in all of our business segments. Operating profit margins expanded 20 basis points to 10.8%, driven by strong underlying performance. Adjusted EBITDA was $1.44 billion, up 5% and up 7% in constant currency. As a percentage of adjusted net revenue, adjusted EBITDA was 10.8%. We expect modest adjusted operating margin expansion in fiscal 2024, driven by a combination of a higher-margin revenue mix and lower corporate G&A. However, we expect an even greater uplift in margins post-separation as we streamline our operating model and cost structure. On a trailing 12-month basis, fiscal year 2023 book-to-bill was approximately 1.1 times. Regarding the performance of our lines of business let's turn to slide 13 for Q4 performance and 14 for full-year performance. Starting with People & Places Solutions. P&PS continues to see solid momentum, delivering strong revenue and operating profit results. Q4 adjusted net revenue was up 11% year-over-year. Growth was consistently strong across all business units. Europe rebounded positively after being our weakest region year-to-date and we saw continued strength in the Middle East, Americas, and Asia-Pacific. Backlog was relatively flat sequentially, although gross margin and backlog was up 8% year-over-year as we continue to focus on improving business quality. P&PS Q4 operating profit was up 12% driven by strong growth, maintaining healthy gross margins and solid G&A management resulted in an adjusted operating margin of 15%, up 16 basis points year-over-year. For the full-year, adjusted operating profit was up 16% and adjusted operating margins were 14.6%, up 100 basis points year-over-year. Our P&PS Americas unit, which is our largest by revenue benefited from legislative drivers and a healthy state and local budgets continuing to book client spending. Internationally, Asia-Pacific and the Middle East continued to be bright spots in the portfolio, supported by Giga Cities and strategic water pursuits. Additionally, our European business showed a positive sequential growth. Now moving to Critical Mission Solutions. Q4 revenue was up 7% year-over-year and backlog is up 8% year-over-year and the business continues to demonstrate a strong win rate against a very healthy pipeline in all of its core focus areas. CMS operating margins were up 128 basis points year-over-year. For the full-year, margins were roughly flat, while operating profit increased 6% year-over-year. Notably, margins continued to rebound throughout the year as forecasted. Moving to Divergent Solutions, adjusted net revenue increased 3% year-over-year in Q4, as we remain focused on portfolio improvement. We expect growth to accelerate from year-end levels as investments mature and lower-margin contracts roll out of backlog. Operating margins for the quarter was up 10.1% -- was 10.1%, a 50 basis point sequential improvement. Turning to PA Consulting. Revenue from PA was up 13% year-over-year in Q4 and increased 4% year-over-year in fiscal year 2023. Based on booking trends, we expect revenue growth to show a positive trend in fiscal year 2024 while remaining cautious of the macro risk as the U.K. goes through an election cycle. PA's Q4 operating profit was 20.6%, up 122 basis points year-over-year and up 21% year-over-year. Utilization continues to improve, and we expect operating margins to be over 20% for the medium term. Our adjusted unallocated corporate costs were $60 million in Q4, roughly flat sequentially and consistent with our guidance. In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model. However, despite initial cost actions taken, we will carry temporary costs associated with supporting the entirety of Jacobs, including the businesses to be separated. We estimate that we are carrying approximately $40 million in temporary cost throughout this transition period. This allows us the opportunity to reinforce our commitment to our clients and enhanced business resilience. We are confident that these efforts will contribute to a stronger foundation and continued excellence in serving our clients as two leading independent companies. Turning to slide 15 to discuss our balance sheet and cash flow. We posted a very strong quarter of cash flow generation, which is indicative of the quality of our earnings. Operating cash flow was $219 million and free cash flow was $180 million. As a result, we were able to deliver above our anticipated 100% reported and adjusted cash flow conversion targets for the year with 104% underlying cash conversion. During fiscal year 2023, we returned 50% of our free cash flow to shareholders for a total of $480 million through both share repurchases and dividends. Though we were unable to repurchase shares in the quarter due to the CMS separation, we utilize cash flow to strategically pay down floating rate debt, ensuring a more robust financial position for the future. This disciplined approach aligns with our commitment to long-term financial stability and value creation for our shareholders. We ended the quarter with cash of $927 million and gross debt of $2.9 billion, resulting in just over $1.9 billion of net debt. Our Q4 net debt to 2023 adjusted EBITDA of approximately 1.4 times remains a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment grade credit profile, both today and as a more focused business, post our announced CMS separation. In August, we completed the offering of $600 million in senior unsecured notes due 2028 with a fixed rate of 6.35%. This allowed us to repay a portion of the amounts outstanding under our revolving credit facility. As of the end of Q4, approximately 35% of our debt is tied to floating rates and our weighted average interest rate was approximately 5%. We intend to opportunistically retire floating rate debt in the coming quarters. For your benefit, in the appendix of the presentation, we have included additional detail on our debt and quarterly interest expense. Given our strong balance sheet and free cash flow, we remain committed to returning cash to shareholders. On November 9, we paid a $0.26 dividend, representing a 13% year-over-year increase. Finally, I wanted to highlight our cost optimization plan shared on slide 16. We recognize that our cost structure is high. And we see opportunities to optimize in the coming quarters and post CMS separation. We have identified over $90 million in run rate savings, including lower corporate and allocated costs to the specific measures that we are starting to action. We expect to reduce our corporate unallocated costs from around $60 million per quarter to approximately $50 million per quarter, including full elimination of stranded costs post separation. We are streamlining our operating model with an eye towards positioning us for growth and cost efficiency, while staying focused on our clients. While we will not yet comment on long-term growth and margin expectations beyond our 2025 strategic plan, we believe we can deliver over 300 basis points of adjusted EBITDA margin expansion from fiscal 2023 as reported margins to fiscal 2025 for standalone Jacobs. This results in an expected adjusted EBITDA margins for standalone Jacobs of at least 13.8% in fiscal year 2025. This is a bold undertaken as it is our longer-term aspiration to deliver best-in-class industry margins. In closing, Bob and I are committed to 3 things over the next few quarters. First, driving efficiencies in our business and maximizing our profitability as demonstrated by the margin targets. Second, position in our business with the financial resources needed for multiyear free cash flow growth. Third, strengthening discipline and deploying our shareholder capital. Thank you. And I will turn the call over to Bob.

Operator:

[Operator Instructions] Your first question comes from the line of Jerry Revich of Goldman Sachs. Jerry, your line is open.

Claudia Jaramillo:

Hi, Jerry, so I would like to -- you have some of the details on this slide. And so let me just go over the details of this slide. So you have first a component of the stranded cost. So that one will happen after the separation. So that's roughly $50 million that you see there. So then you have one that we started to taking action, which is really the operating model, and that will obviously accelerate after the separation, but we've already taken action on that. So you'll see some of that over time in ‘24 and accelerated after the separation. And then as I mentioned in my prepared remarks, you have the overhead or the unallocated corporate that we normally see -- you normally see it as a separate line. And I talked about the $60 million down to $50 million. We will carry some temporary costs to support CMS as we prepare it for the independent company or the combined company. And that one as well, you'll accelerate in 2025. So in summary, you'll see a little bit in '24 accelerating after the separation. If I want to give you the nature of what is that, is really the -- a lot of the support is IT, the support layers and just in general, a simpler management structure and support.

Bob Pragada:

Yes. What we laid out over a year ago, Jerry, continues. With regards to the P&PS margin expectations in that strategic time period, that hasn't changed.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein. Chad, your line is open.

Claudia Jaramillo:

So Chad, the 13.8% is the stand-alone Jacobs, so it excludes CMS and Cyber & Intelligence. And then the nature of those costs is the three buckets that I mentioned before, which are really corporate unlocated going from the $60 million run rate to $50 million run rate post separation, and then the operating model, which is $50 million in total run rate and then full elimination of stranded costs up to the separation.

Chad Dillard:

Got you. Okay. That's helpful. And then just a question for you on backlog growth. I appreciate that gross margin in backlog is growing by 8%. But I was hoping maybe you could frame backlog growth, excluding the capacity revenues. Just really trying to understand what were some of the puts versus the takes, strength versus weakness that you're seeing underlying in People & Places? And then maybe you can talk about just the size of the pipeline.

Chad Dillard:

Got it. Thank you.

Michael Dudas:

Hi, good morning, Claudia.

Bob Pragada:

Good morning, Mike.

Bob Pragada:

So two parts. One, Mike, you're asking about kind of what are some of the other end market secular trends that we're seeing? And then the second part of the question is around how do we see kind of revenue models as our consultancy business continues to grow -- consultancy type business. Is that fair?

Bob Pragada:

Sure, sure. The other verticals, I mentioned of our top 30 wins, nine are in water. If you take water and advanced facilities, it's -- half of the top 31s were in both of those sectors, six big advanced facilities markets, too. So we continue to see strong activity within the advanced facilities world, probably driven more so now as we bottomed out from an end market standpoint as far as sales goes within the semiconductor industry. Keep in mind, our clients continue to spend through there. But now with the GLP-1 drugs going on in life sciences and all the strength that we see with our clients we've had for years, advanced facilities is going to continue to be strong. And then the others, I'd highlight is energy transition. I highlighted a specific job, but the whole grid modernization of everything that we're seeing, and we're kind of in that consultancy component of that, and that's a strong piece, which is a segue to the second part. I would say that, that continued profile of our portfolio within now, call it, independent Jacobs, is we're kind of in the early innings of that. And so it's going to be a balance. But I'd say over the course of the next two or three, four years, it's going to drive that margin expansion even beyond what Claudia talked about post '25 with a cash conversion component to that that's very high.

Operator:

Your next question comes from the line of Andy Kaplowitz with Citigroup. Andy, your line is open.

Bob Pragada:

Good morning, Andy.

Claudia Jaramillo:

Yes. So Andy, so let's start with the first one, which is the big one and explains roughly half of the gap is the tax piece. And I had -- I included some of them in my remarks. So if I take, it's $0.06, so it's more the -- when you have a one-off allowance, and this is something that happens with your deferred tax. And -- so then the next one is going to be basically overhead costs or unallocated is one, we call it corporate unallocated. That's the other big piece. And then the share count, and I mentioned why we could do stock repurchases in the fourth quarter given -- based on the transaction. So that's at a high level what that means. Then I added some of the commentary that is on the temporary cost that we're carrying as we prepare CMS and the Cyber & Intelligence unit to operate independently. So that's the other piece of the puzzle, if you want.

Claudia Jaramillo:

Absolutely. And that's what Bob mentioned that towards the end, that's really our earnings power should exclude that -- those temporary costs. We're very client-centric. It's our clients' mission, and we want to make sure we have quite a bit of value tied to this transaction and the upside that we included in this additional value that we're going to get in the transaction and the new entity. We won the two entities to be very successful. It's temporary. And is to make sure we're preparing to have a very leader that we want and that we continue to be.

Bob Pragada:

So Andy just to clarify. So the EBITDA guidance that I gave at the end we're carrying it in that guidance.

Bob Pragada:

Yes. I think on the backlog piece of the question, Andy, my answer is yes, I think that mid- to high single-digit growth will continue. Remember, we've got a really nice diversity within P&PS. So if we think about some of the political risk or what's happening with interest rates, which might be affecting some of our private sector clients, there's not a full immunity, but our private sector clients continue to spend just because of the -- whether they be technology-based or global supply chain based, I say technology-based science-based drivers or supply chain drivers that has continued, and that's really been driving the performance. As far as IIJA or a larger infrastructure around energy transition outside the U.S., we have not seen that effect. In fact, our pipeline continues to grow at mid to high-single-digit percentages, and this is on a base that's very high.

Operator:

Your next question comes from the line of Bert Subin with Stifel. Your line is open.

Bob Pragada:

Hey, Bert.

Bert Subin:

Bob maybe just taking that, I think that was more of a backlog question. You said in your prepared remarks, the outlook remains very healthy. Can you just walk us through how you're thinking about the organic growth profile for the company in this coming year? Just for Remainco, you think the previous range for FY '24 for P&PS was a 6% to 9% organic CAGR, with PA Consulting at 12% to 15%, do those remain intact? And on the advanced facility side, pretty positive comments there. Do you think that can keep growing double digits?

Bert Subin:

Got it. Okay. And maybe just a level deeper into the P&PS side. You mentioned some positive remarks on water and on international opportunities. Can you just sort of give us the viewpoint on how you're thinking about, I guess, the regional disparity in FY '24? As FX starts to become less of a factor, do you think what you're seeing in Europe and other parts of the world can rival sort of the growth we're expecting from IIJA in the U.S.?

Bert Subin:

Thanks, Bob.

Steven Fisher:

Thanks. Good morning. I just wanted to follow-up on the mix element of the 300 basis point margin bridge. I think, Bob, when you were talking about the half before that's mix, like how much of that is related to just not having the lower margin in CMS in there versus achieving better margins in P&PS? I guess I'm wondering when all is said and done with your cost optimization, will your segment-level margins be better? Or will that come out of some other initiatives over time?

Steven Fisher:

Yes, it does. So as part of the cost optimization, there is segment level efficiency initiatives as opposed to just sort of the corporate level element. Yes, that's helpful.

Steven Fisher:

Okay. Great. And just trying to think about your debt position in about 12 months from now. I'm not sure if I missed if you frame this out or not, but $1.9 billion of net debt now, $1 billion of dividend coming back from the separation to pay down debt. Free cash flow looks like it would be about another $1 billion before whatever cash restructuring expenses you're calling out. I don't know how much that is. But are you assuming close to sort of a net cash position exiting 2024?

Steven Fisher:

Thank you very much.

Operator:

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

Bob Pragada:

Hey, Gautam. Good morning.

Gautam Khanna:

I was wondering if you could characterize the risk profile, some of the projects you've been booking in the backlog given the margins seem to be higher. Are these mostly fixed cost, what allows the profits to be higher? Just the mix of fixed price? Is there any more -- just how would you characterize. Thank you.

Gautam Khanna:

Okay. And just one quick follow-up. You guys have talked about your PFAS technology. I was just curious if you've had any commercial traction yet? And if not, when do you anticipate booking some of that PFAS-related work?

Gautam Khanna:

Thanks, guys.

Sabahat Khan:

Great, thanks and good morning. I guess I just want to get a little bit of perspective on maybe just the medium term even if it's directionally. As you look at the 13.8% in fiscal ‘25, and maybe just think about your mix by end market and region. If we just think moving on from that, is there opportunity whether to maybe look within P&PS for maybe lower margin businesses? Or where you expand geographically? I'm just thinking about the levers kind of going forward you see for the P&PS margins beyond just cost optimization to sort of get to that level in a few years?

Claudia Jaramillo:

Yes. So I'd say this is something that we do -- we're doing currently, and we do all the time. So I would say two big levers are the -- our global delivery platform is one, very important, and we have one of the best platforms, if not the best, and it's been for several years. That's the first one. The other one is the digital enablement. And you see at some of the projects that we highlighted today are you see a clear differentiation that we have compared to our competitors, where we -- the digital enablement and the outcome based that Bob mentioned before, drives those more profitable projects.

Sabahat Khan:

Okay. Great. And then as you think about your guidance for kind of next year, kind of the numbers embedded in your three-year plan, you laid out the 6% to 9% for P&PS. And even as you look out sort of maybe another year beyond that, what mix of price versus volume do you anticipate given some of the funding that's in the system right now? And how should we think about that mix over the next couple of years, particularly in the kind of infra space?

Sabahat Khan:

Great. Thanks very much.

Andy Wittmann:

Oh, great. Thanks for taking my questions here. I guess it would just be kind of helpful to understand the timing on the $275 million of costs associated with all these actions. It sounds like there's going to be some here ahead of the transaction, but some probably translate to after the transaction. Claudia, can you just talk about the timing of those cash items and recognition of those on the income statement?

Andy Wittmann:

Okay. And then I guess -- I don't to do next. I guess I guess on the 1Q guide, I guess I just want to get a little bit more comfortable with that. I don't think you're saying that the corporate unallocated cost run rate is going to be higher in 1Q. It sounds like you're saying it's going to be about the same. I just wanted to confirm that. Then when you talk about the seasonality, I guess, there's always seasonality in 1Q. What's different about this year's seasonality? Is it just the fact that the items that were called out in last year's footnote that present a tough comp that weren't excluded? And I guess maybe related to that, if there are costs that are related to restructuring and separation, why aren't those being excluded in the first quarter?

Andy Wittmann:

Alright, thank you.

Bob Pragada:

Yes. Thank you, everyone. We're excited about the future, and we look forward to providing more updates as we progress our exciting plan forward. Thank you, everyone.

Operator:

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Jonathan Evans:

Thank you. Good morning. Our earnings announcement and 10-Q were filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide two of the presentation material for information about our forward-looking statements and non-GAAP financial measures. Turning to the agenda. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and CFO, Kevin Berryman. We are also joined by our incoming CFO, Bob will begin by providing an overview of recent activities and summarizing highlights from our third quarter results. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. And Claudia will provide an overview of separation-related activities. Finally, Bob will provide details on our updated outlook along with closing remarks, and then we'll open up the call for questions. Before I hand it over to Bob, I want to address some reporting changes that were made in the quarter. We consistently review our reporting practices to be aligned with best practices for our industry and SEC guidelines. After review, we have decided to amend our name and convention for revenue, excluding pass-through costs from net revenue to adjusted net rent revenue. Note, this is simply a name change intended to make the non-GAAP nature of this measure more prominent and does not impact measurement. In addition, after an internal review, we have made certain minor adjustments to pass-through revenues in certain prior periods to properly reflect amounts that had not been previously included. As a result, in the materials that we have included in the appendix to this presentation, we have adjusted People & Places adjusted net revenue for fiscal 2022 and fiscal 2023. Note, this change has been deemed as immaterial has no impact on our reported earnings, operating income or cash flow. With that, I'll turn it over to Bob.

Kevin Berryman:

Thank you, Bob, and let me turn right to Slide nine for a financial overview of our third quarter results. Third quarter gross revenue grew 9% year-over-year and adjusted net revenue grew 7.5%. Adjusted net revenue grew 8% year-over-year on a constant currency basis. Gross margin in the quarter as a percentage of adjusted net revenue was 25%, down slightly year-over-year, primarily due to PA Consulting. I will provide additional comments regarding our segments later in my remarks. Adjusted G&A as a percentage of adjusted net revenue was 14.7%, over 100 basis points better sequentially and year-over-year more than offsetting the lower gross margin; Costs were well managed due to discipline and actions taken, and we are still targeting G&A as a percentage of adjusted net revenue to stay well below 16% for the full fiscal year 2023, improving upon the 16.2% figure realized in 2022. GAAP operating profit was $270 million for the quarter and included $52 million of amortization from acquired intangibles, other transaction and separation-related costs and restructuring efforts of $38 million and a $1.4 million noncash charge related to decreasing our real estate footprint aligned to our future work strategy. The other transaction, separation related and restructuring costs of $38 million included three distinct types of costs. The first represents approximately 45% of the $38 million and relates to a restructuring initiative in our PA Consulting business to rightsize the cost structure to align with the company's end market demands. The second cost represents approximately 35% of the amount and is associated with our initial advisory and other costs associated with the separation of the CMS. Third bucket, which is approximately 20% of the $34 million, is related to the cost of noncash PA contingent equity-based agreement associated with the PA transaction structure and other miscellaneous incentive costs that were considered part of the total consideration of previous transactions. Excluding these items, adjusted operating profit was $361 million, up over 10% year-over-year. Our total discrete items for the year, excluding the new CMS separation efforts, will remain at the $100 million figure that we have forecasted for the year, well below the total figure of $185 million in 2022. Of this $100 million figure, the total noncash impairment costs will total approximately $45 million. Such impairments will be largely complete as we exit this fiscal year. Of course, as we go forward, our costs will now include expenses to be incurred in connection with the planned separation of CMS. I would let Claudia provide more detail in her prepared remarks. Our adjusted operating profit to adjusted net revenue was 10.7%, up 30 basis points year-over-year. I'll discuss the underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.29 per share and included a $0.27 impact related to the amortization charge of acquired intangibles; $0.20 from transaction, restructuring and other related costs, a $0.01 noncash impairment charge related to reducing our real estate footprint; and a $0.05 adjustment to align to our projected annual adjusted tax rate. Excluding these items, third quarter adjusted EPS was $1.82, down 2% year-over-year. Importantly, while down versus the year ago period, 2022 benefited from the $0.08 cost investment gain associated with the sale of our WatchGuard investment. In addition, in 2023, incremental interest costs of $0.07 have reduced EPS this quarter versus the year ago figure. The net impact is a $0.15 headwind in EPS year-over-year. As we look ahead to our full year forecast, with Bob providing an overview of our guidance range at the end of our call, we expect Q4 EPS to show healthy growth versus the year ago period. Q3 adjusted EBITDA was $355 million and was down 2% year-over-year, representing 10.5% of adjusted net revenue. Finally, backlog was up 3% year-over-year. The revenue book-to-bill ratio was 1x, with our gross margin and backlog, again, improving year-over-year. Regarding our LOB performance, let's turn to Slide 10 for Q3. People & Places Solutions continues to see solid momentum, delivering strong revenue and operating profit results. Q3 adjusted net revenue was up 9% year-over-year and up 10% in constant currency. Growth was consistently strong across almost all business units, led by advanced facilities. Europe continues to see some pressure, but was more than offset by strength in the Middle East, Americas and Asia Pacific. Backlog was flat year-over-year, although gross margins in the backlog was up 8%, as we continue to focus on improving the quality of work Q3 operating profit was up 13% and 15% in constant currency, driven by strong growth leverage and solid G&A management, resulting in operating profit as a percentage of adjusted net revenue of 14.4%, up 60 basis points year-over-year. We expect year-over-year improvement and strong people in places operating profit margin and growth to continue in Q4. Our Advanced Facilities unit, which represents approximately 1/4 of our People & Places revenue and benefits from investments in the life sciences, semiconductor and electric vehicle supply chains, posted at sixth consecutive quarter of double-digit revenue growth. Despite macroeconomic crosscurrents, our Tier 1 customers continue to pursue robust spending plans underpinned by long-term demand drivers. Our backlog and sales pipeline remains healthy, and we continue to be encouraged about the outlook for this segment. Our People & Places Americas unit reported Q3 operating profit with 10%-plus growth as legislation-driven backlog begins to convert at higher rates. For example, IIJA-related profit is trending nearly 20% ahead of our current plan. We remain enthusiastic about our overall growth opportunities with double-digit pipeline growth led by water, cities and places and energy and power. Our Q3 international business, revenue and operating profit were up high single digits year-over-year as Asia Pacific and the Middle East continue to be a bright spot in the portfolio, supported by Giga Cities and strategic water pursuits. Moving to Critical Mission Solutions; Q3 revenue was up 7% year-over-year and up 8% in constant currency. CMS has benefited from an over 70% win rate year-to-date. And as a result, backlog is up 12% year-over-year. The sales pipeline also remains very healthy as CMS positions for strategic growth in its core focus areas of space, defense, energy and technology solutions. CMS operating profit and OP margin were both up sequentially and year-over-year, consistent with our previous guidance, with operating profit up 12% year-over-year. We continue to expect operating margins to approximately 8% on a full year basis as we convert on an IDIQ pipeline of higher margin opportunities. Moving to Divergent Solutions; adjusted net revenue increased 3% year-over-year as we remain focused on higher-margin contracts. This trend should be expected to continue near term before an acceleration in coming quarters as our investments in sales and technology offerings bear fruit. Operating profit margin for the quarter was 9.5%, a sequential improvement as compared to Q2's underlying normalized margin when adjusting for the benefit of a large license sale in the prior quarter. We have increasing confidence that the underlying margin momentum over the past two quarters is durable. And as a result, we continue to expect divergence, quarterly margins to approach 10% in Q4. Turning to PA Consulting. Revenue from PA was up 3% year-over-year with a book-to-bill of 1.1x, an indication of the company's relative performance to peers driven by their value to clients in a tough economic environment. PA's Q3 operating profit margin was 21.2%, up 270 basis points year-over-year and up over 15% year-over-year. PA management continues to take action to improve utilization, and we expect OP margins to be 20%-plus for the medium term with potential for longer-term improvement. Our adjusted unallocated corporate costs were $62 million in Q3, consistent with our guidance. We expect that our quarterly run rate may remain elevated at or above the recent level for a short period of time. In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model focused on infrastructure and advanced facility. Claudia will provide her perspective in her prepared remarks. Turning to Slide 11 to discuss our cash flow and balance sheet, we posted a very strong quarter of cash flow generation, which is indicative of the quality of our earnings despite temporary restructuring and separation-related efforts. Free cash flow was $290 million, resulting in a year-to-date 127% conversion of net income into free cash flow. As a result, we are well positioned to deliver at or above our anticipated 100% recorded and adjusted cash flow conversion targets for the full year. Regarding the deployment of our free cash flow, we remain agile and opportunistic in repurchasing shares. During Q3, we repurchased $125 million in shares at an average price of $115. We ended the quarter with cash of $1.1 billion and gross debt of $3.2 billion, resulting in just over $2.1 billion of net debt. Our Q3 net debt to 2023 expected adjusted EBITDA of approximately 1.5x remains a clear indication of the continued strength of our balance sheet. We remain committed to maintaining investment-grade credit profile both today and as a more focused business post our announced CMS separation. As of the end of Q3, approximately 56% of our debt is tied to floating rate debt, and our weighted average interest rate was 5%. We intend to opportunistically retire floating rate debt in the coming quarters. For your benefit, in the appendix of the presentation, we have 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 increased 13% year-over-year and will be paid on August 25. Before I formally transition the CFO role to Claudia on August 14, I wanted to say a few words on my last earnings call. It has been an honor working with such talented colleagues and witnessing our collective accomplishments over the past 8.5 years. During my tenure, I have observed growth and transformation within our company and I am immensely proud of the achievements we have made together. I extend my heartfelt thanks to the Board, leadership team and dedicated employees for their unwavering support, passion and commitment to excellence; to our investors, your trust has been instrumental in our success. While my time as CFO comes to an end, I remain confident in the company's bright future and have no doubt that the company is in good hands with Claudia in the CFO role. I also look forward to supporting Bob in my new role as a special adviser going forward. I will now turn the call over to Claudia.

Robert Pragada:

Thank you, Claudia. Turning to Slide 13, due to strong year-to-date performance and forward indicators, we reiterate our outlook for FY '23 adjusted EBITDA to a range of $1.42 billion to $1.47 billion and adjusted EPS to $7.25 to $7.45. We will provide guidance for fiscal year 2024 in conjunction with our Q4 earnings release. Turning to Slide 14, in closing, I would like to express my tremendous appreciation for Kevin's contribution to the transformational success of our company over the last 8-plus years. Kevin is a great personal friend and has been a fantastic business partner. I am privileged to have his continued support as my special adviser. We are very fortunate to have Claudia as a critical leader on our team. I look forward to her continued accomplishments and contributions building on her success to date. Operator, we will now open the call for questions.

Michael Dudas:

Good morning, Claudia. Jonathan. Bob. And well done, Kevin. Thank you. Bob, I'm encouraged about the continued backlog margin improvement. Maybe you could share a little bit about where that margin improvement this quarter is coming from? And as you look at the pipeline and some of the recent bookings, how that may play through as we move into 2024 and the mix, given the -- either the three biggest if you want to include CMS on that margin improvement expectation for 2024?

Operator:

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

Kevin Berryman:

Thank you, Andy.

Robert Pragada:

Yes. Andy, unfortunately, we can't. That's -- right now, I've just mentioned that the interest is strong. We're evaluating. And we can't go into any more detail on that. I apologize.

Robert Pragada:

We do. We do. The IIJA component is really kind of in the -- I'd still say it's in the early innings, but we're seeing that flow through Andy, we actually got in front of that with the grant component and assistance in the grant applications. That now, coupled with the formulaic based funding that's flowing, has really helped. So yes, we do see that legislation-driven funding, not just IIJA, but also the other legislation that's been passed and that moving forward is going to continue to be a big piece. The other thing that it's done is it has -- it's kind of stimulated other legislative acts around the world. I think there's an EU Chips Act that we've now seen some of the components to as well as infrastructure stimulus coming out in other parts of the world. So kind of the world is getting behind this.

Jamie Cook:

Nice quarter. And congrats, Kevin, and thanks for all your help as well throughout the year. I guess my first question, understanding the margin story that you're talking about consulting mix, project delivery, digital enablement. But as you, depending what happens with CMS and we have the new Jacobs, is there a greater opportunity on the cost side, just to sort of restructure streamline costs as well as what you're seeing on the project delivery or mix side? Just wondering if there's a cost story there. And then my second question, it was nice to see the strong cash flow in the repurchase in the quarter here. Can you talk about sort of shorter-term capital allocation priorities, share repurchase the way that investors should continue to think about things with acquisitions being more in the sideline?

Claudia Jaramillo:

So thank you, Jamie. On the first one, the cost opportunities. So as I mentioned in my prepared remarks, we see the opportunity -- day 1 is just to start. And with a more streamlined strategy and the business model, we see lots of opportunities for more efficiencies as we can also leverage more our global delivery platform. So efficiencies, more focused strategy and the agility that, that will bring. So lots of opportunities on the cost optimization front. On the capital allocation structure, we are -- we said it before, we are very happy with the opportunities we have, our portfolio. We are focusing on our organic growth, and we see it. We've building this portfolio over time. We see the opportunities to invest in ourselves to continue delivering this growth. So we prioritize that and returning excess cash to our shareholders. So those are the priorities and all that really on a risk-adjusted basis.

Jerry Revich:

Hi, good morning, everyone and Kevin, congratulations. I think in your nearly 9 years, the stock has nearly quadrupled. So well done, and Claudia congratulations again. .

Jerry Revich:

I'm wondering if you could just ask on advanced facilities just based on the disclosures, it looks like that's about 1/4 of People & Places at this point, so a really good performance so far. Can you just talk about, given the backlog in that business, is there a runway for that portion of the portfolio to be 30% or more of People & Places over the next year or 2? Just if you could touch on the backlog, Bob, if you don't mind?

Operator:

Your next question is from the line of Bert Subin with Stifel. Your line is open.

Robert Pragada:

Thanks, Bert.

Bert Subin:

Maybe just a follow-up on that question, Bob, if you think that Advanced Facility is going to become a larger part of the business and the rest of the business is sort of already on track to grow high single digits, at least in the medium term. Does that lead you to believe that, that business can continue growing double digits for a period of time?

Bert Subin:

Got it. And then just a broader P&PS question. Can you just sort of walk us through what sequentially changes, I guess, as we think about the fourth quarter? I know FX will become relative tailwind, but the guidance has seemed to imply that margins remain at or above sort of the targeted range that you guys have out there with sales potentially also stepping up. So is that in your view, sort of largely driven by IIJA ramp you're starting to see projects come through or is there something else that's posting that?

Kevin Berryman:

Look, I would say it's a variety of things

Sean Eastman:

Hi, team. Thanks for taking my questions and, Kevin, I just wanted to say a very impressive CFO tenure. Congratulations. I wanted to press Claudia on the efficiencies and streamlining comments a little bit more. And I realize it's early days, but I'm just curious where we should expect to see that enhancement? Is it kind of across all the segments? Is it more so in the corporate costs? And then also, Kevin, I think you made a comment about the corporate costs remaining elevated for a short amount of time. So I wondered if that run rate is expected to step down going into next year? Some clarity there would also be helpful.

Sean Eastman:

Okay. And my follow-up would be for Bob. I think it was relative to P&PS, but I think you made a comment about being able to continue to grow at current rates. So I just wanted to flesh out as much as we can relative to the top line growth expectations for RemainCo on a go forward?

Operator:

Your next question is from the line of Chad Dillard with AllianceBernstein. Your line is open.

Robert Pragada:

Sure, Chad. The pipeline within the water sector, and I'm talking globally, is probably the fastest-growing pipeline that we have in the business, and that is in the 30%, 40% year-on-year growth in the pipeline. So very robust, being driven by a infrastructure EPA regulations in the states as well as just the need for water, the drought infested areas of not just the U.S. and all that's happening around climate change and then our climate response is driving the need. This need is being funded in a whole variety of sources. I mean these are user fees, these are supplemented by certain government actions that are happening around the world. So all of kind of the drivers are strong and they're not going away. The need is high and governments and state and municipal areas are standing behind it. So we're -- and we're right in the middle of it. And as you know, Chad, we've been a leader in that sector for decades, and that's really coming through.

Robert Pragada:

Yes. I'd say margins right now are above kind of the mean margins within the sector today. I think there's some room there. And I think that it's going to continue to be a major part of our overall enterprise-wide portfolio moving forward.

Kevin Berryman:

Are you talking specifically on PA or what...

Kevin Berryman:

Just PA?

Kevin Berryman:

Well, look, the cost actions have been taken. So we're expecting on a go-forward basis that, that will improve the margins. we have been talking about utilization and rightsizing the business for a while. And ultimately, the management team got to the point where they decided to proactively go after it as opposed to grow into it. And so we're excited about the ability for that to have taken place. Really good work by the management team. And so that run rate is effectively being embedded into the business going forward.

Kevin Berryman:

And sustainable.

Operator:

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

Robert Pragada:

Yes. Steve, I think that from a sustained standpoint, we've been vocal that we could drive double-digit growth from a bottom line perspective. I think there was an earlier question around mix. So we're going to have events where we might get some pops in the business. But I'd say on a sustained go-forward basis that double-digit growth in the sustaining area where it's at now is the way to think about it.

Robert Pragada:

Yes. I'd say a couple of things, Steve. One is that we have been very deliberate over the course of several years. And Kevin and I have talked a lot about it over the last years and now you're hearing Claudia say the same thing is that we feel comfortable of those end markets that we are acutely focused in on, have got strong tailwinds. Wouldn't -- nobody is going to say that they are resilient of recession. But those tailwinds aren't going anywhere and are probably less tied to inflation than other consumer-driven type of areas. And even in the area that we have some exposure to the broader consumer, these are now in the world of life sciences and chips and broad-based manufacturing that is tied to geopolitical as well as geoeconomic kind of reshaping of the world. So from a portfolio standpoint, we feel strong. And wherever the economy is going, those tailwinds, we feel confident in. The other is around our operations and our cost posture. We're doing a lot right now on the operating model and how we run the company and how we go to market, and we're using this inflection point with the separation of CMS to even accelerate that component, talk a little bit about in the prepared remarks. So that's creating more internal resilience. And then the last I would say is something that Claudia spoke about earlier, and that's cost optimization. We have known us -- Steve, you've known us for a long time, for decades, we have been a company that has been very acutely focused in on cost and cost management and that's in our DNA, and we're going to continue to do that as we continue to look at the leaner structure prospect.

Andrew Wittmann:

Great. Good morning. Thank you for taking my questions. And Kevin, it's been a pleasure. I guess I wanted to ask about some of the cash restructuring costs. It looks like they're down the new outlook for them. The split of cash is up a little bit, noncash real estate down a little bit. I suppose that's probably related to the $17 million for PA taken in the quarter on cash restructuring. But I guess there's kind of 2 questions that come out of this. One is, do you think that this round of restructuring charges can flow through to the profit line, recognizing in the past, the various restructuring programs we've had in the past have generally been reinvested for growth? And the second question would be, given that '23 is a little bit higher on the cash restructuring costs, what do you think the outlook for '24 could be? Obviously, the CMS been or the potential sale is a big factor, but do you think that the costs will be up or down versus the roughly $55 million of cash cost that you expect to recognize in 2023?

Kevin Berryman:

Maybe -- thanks, Andy. But let me take a stab. As Claudia suggested in her prepared remarks, we're working through that right now as we speak, relative to the CMS separation efforts. And so it's premature to really give any perspective on that. I think the bottom line relative to your cash comment for 2023 is basically correct. And so at the end of the day, I think the other point that you asked, is it going to be -- it's going to drop to the bottom line or be reinvested? I think that Claudia has made it very clear in her comments that the stranded cost opportunities are, we believe, of substance, and that's going to take a lot of hard work to get after it. But I think we'll leave it there. And fundamentally, I think what the plan will be is that we'll give some additional color, Claudia and Bob will give some additional color when we talk in our Q4 earnings release and outlook for 2024.

Andrew Wittmann:

Got it. I guess for my follow-up question, I would just ask about Divergent here. I heard the comments for the fourth quarter. This business has always had kind of an implicit kind of ramp that you believe that some of the contracts that you're on will start contributing more significantly. I guess the question is, what's the visibility you have into that ramp? And do you still believe that, that revenue ramp can lead to better fixed cost coverage and push margins up more materially even than you've realized in the last couple of quarters, which has been notable for sure?

Operator:

[Operator Instructions] Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open.

Robert Pragada:

Sure. Sabahat, it's really the early phases of the early innings have been probably indexed more towards transportation. So we're seeing more in that. But now we're kind of starting to see the front end of different -- I mentioned the New Orleans job where we're doing some green fleeting of the bus systems and the other transport. So under the guides of transport, with now some clean energy components that are tied to it, and we'll start to spill over in some IRA application as well. I would say on the larger, whether it be some of the lead-free work or -- I'm sorry, the lead pipe and the lead topic work as well as some additional support of some of the larger water infrastructure, we would expect to see that coming up, too. So transport first, moving into clean energy and the energy component of transport and then down the road water.

Claudia Jaramillo:

Yes. So the PA comment is really focused on PA and it's more aligned with the end markets that PA has. So they have a lot of strength in specific markets and then is more aligned the resources with that strength in some markets and then what they see in the other markets that are more flat. So that's really PA related. And then CMS is more the connectivity with -- between CMS and the rest of the company and the comments that Bob made about our efforts looking at our operating model and all the efficiency gains and productivity that we see as we have cost reductions with a more streamlined strategy and execution.

Sabahat Khan:

Thinking about the savings from P&PS. Okay. So we should see them in '24?

Operator:

There are no further questions at this time. I will now turn the call back to Mr. Bob Pragada.

Operator:

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Jonathan Evans:

Thank you. Good morning. Our earnings announcement and 10-Q were filed this morning and we have posted a slide presentation on our website which we'll reference during the call. In addition, this morning, we published a release announcing our intent to create 2 independent companies with the separation of our Critical Mission Solutions business. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements and non-GAAP financial measures. Turning to the agenda. Speaking on today's call will be Jacobs CEO, Bob Pragada; and CFO, Kevin Berryman. We are also joined by our incoming CFO, Claudia Jaramillo. Bob will begin by providing an overview of today's portfolio announcement, then summarizing highlights from our second quarter results. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks. And then we'll open up the call for questions. With that, I'll turn it over to Bob.

Kevin Berryman:

Thank you, Bob and good day to everyone. Turning to Slide 10 for a financial overview of our second quarter results. Second quarter gross revenue grew 6% year-over-year and net revenue grew 5%. Net revenue grew 8% year-over-year on a constant currency basis, a continuation of healthy growth against a tough 10% year ago comparison. Adjusted gross margin in the quarter as a percentage of net revenue was 26% sequentially in line with the first quarter but down year-over-year. I will provide additional comments regarding our segments later in my remarks. Adjusted G&A as a percentage of net revenue was 15.6%, approximately flat sequentially but down 90 basis points year-over-year, more than offsetting the lower gross margin percentage versus last year. While we felt the impacts from inflationary pressure, costs were managed well overall to a disciplined cost management. We are still targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $290 million for the quarter and included $50 million of amortization from acquired intangibles, a $10 million noncash charge related to decrease in our real estate footprint aligned to our future work strategy and other acquisition deal-related costs and restructuring efforts of $8 million. These deal-related costs are largely incentive compensation that was considered part of total consideration and PA noncash contingent equity-based agreements associated with the PA transaction structure. Excluding these items, adjusted operating profit was $356 million, up 7% year-over-year. On a constant currency basis, adjusted operating profit was up 11% year-over-year. We remain committed to reducing our restructuring-related costs. Consistent with our previous comments, we expect approximately $15 million of restructuring charges for fiscal year 2023. We also expect a total $50 million to $55 million in noncash real estate impairment charges over the course of the year as we continue to further execute our work -- future of work strategy. Finally, we expect $25 million of transaction-related expenses for the full year from deal-related integration and other costs, most of which is performance-based incentives that were factored into our total purchase price consideration for these acquisitions. It also includes the noncash contingent-based equity noted earlier associated with our PA transaction structure. These costs do not include expenses to be incurred in connection with the planned separation of CMS, given the early stage of our process. Our adjusted operating profit to net revenue was 10.4%, up 20 basis points year-over-year. I'll discuss the underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.70 per share and included a $0.20 -- $0.26 impact related to the amortization charge of acquired intangibles, a $0.06 noncash impairment charge related to reducing our real estate footprint, $0.03 from transaction, restructuring and other related costs and a $0.25 adjustment to align to our projected annual normalized adjusted tax rate as a result of a large FIN 48 reserve release. Excluding these items, first quarter adjusted EPS was $1.81, up 5% year-over-year. As we look ahead to our full year forecast, Bob will provide an overview of our narrowed guidance range later in his prepared remarks. We also note that our Q3 EPS is expected to be relatively flat sequentially to Q2. I would like to highlight that the fiscal year 2022 third quarter adjusted results benefited from a onetime $0.10 gain on an equity investment. Q2 adjusted EBITDA was $358 million and was up 5% year-over-year, representing 10.4% of net revenue. Finally, backlog was up 4% year-over-year and 5% on a constant currency basis. The revenue book-to-bill ratio was 1.2x with our gross margin in backlog, again, improving year-over-year. Regarding our LOB performance, let's turn to Slide 11 for Q2. Our results in the quarter continue to demonstrate the strength of our portfolio and end market resiliency, enabling us to deliver strong, consistent OP growth. People & Places Solutions continues to drive our momentum. Overall, PMPS delivered strong revenue and operating profit results driven by an alignment to the secular growth trends and legislative drivers previously highlighted. Q2 net revenue was up 7% year-over-year and up 10% in constant currency. Growth was consistently strong across almost all business units although Europe continues to see some pressure. Backlog grew 4% year-over-year behind a book-to-bill of 1.1x. Gross margin in backlog was up nearly double digits in constant currency. Q2 operating profit was up 21% and 25% in constant currency, driven by strong growth and G&A control. Operating profit as a percentage of net revenue was 13.5%, up over 150 basis points year-over-year, again, driven by solid revenue growth and continued cost discipline. We continue to expect year-over-year improvement in People & Places operating profit margin resulting in strong double-digit growth in full year operating profit. Our Advanced Facilities unit which benefits from the investments in the life sciences, semiconductor and electric vehicle supply chains posted another quarter of double-digit revenue growth. We continue to monitor the macro demand trends across sectors that impact our advanced manufacturing clients and we continue to see robust demand from our life sciences clients which comprise approximately 2/3 of this business. In semiconductors, the evolving macro backdrop has led some smaller clients to evaluate project timing but we remain confident in the long duration opportunity ahead for Jacobs. Our backlog and sales pipeline remains robust across a diverse set of customers. And as a result, we continue to expect our Advanced Facilities growth rate to persist against a very strong year ago comparisons. Our People & Places Americas unit reported record Q2 profit with 30% year-over-year growth as our high-quality backlog begins to convert to revenue at improving incremental margins. We remain enthusiastic about our growth opportunity as backlog and sales pipelines remain robust as we compare to stronger year-ago comparisons. In particular, our water sales pipeline of opportunities continues to shine, up double digits. Our international business, Q2 revenue and operating profit were up single digits year-over-year. Asia Pacific and the Middle East continues to grow, driven by strong pipelines in transportation, cities and places and energy transition. Moving to Critical Mission Solutions CMS benefits from highly recurring multiyear contracts that require limited overhead support. The business is aligned to space exploration, national security, nuclear remediation priorities and U.S. 5G telecom investments. Q2 revenue was up 5% year-over-year and up 7% in constant currency. CMS book-to-bill was just over 1.4x benefiting from the Kennedy award that we previously disclosed. As a result, backlog is up 8% year-over-year. The sales pipeline also remains strong with $30 billion in new opportunities that we are pursuing. In addition, we are awaiting award on $10 billion in new business opportunities that are in the end gain select process. CMS gross profit margins improved sequentially due to mix. CMS operating profit and OP margin were both up sequentially from Q1 and consistent with our previous guidance but down slightly versus the very strong year ago quarter. We expect operating margins to improve in the second half of fiscal 2023, with full year CMS margins expected to approach 8% on a full year basis as we convert on an IDIQ pipeline of higher-margin opportunities. Moving to Divergent Solutions. Net revenue declined 3% year-over-year as we focus on quality growth opportunities that will translate into higher margins. We continue to expect net revenue growth to accelerate in the second half of our fiscal year as we start to see growth from our investments in sales, data solutions and technology offerings. Operating profit for the -- operating profit margin for the quarter was above our corporate average at 11.1%. During the quarter, we recognized a large license sale which expanded the margin by more than 300 basis points. Sales of these types of solutions are now a longer-term financial benefit of our Divergent Solutions strategy and a core offering of the reporting unit. Although deals of this size should not be expected to recur every quarter. Even excluding the benefits of the license sale, the underlying margin momentum seen in Q2 continued to improve sequentially for our previous guidance. As a result, we expect Divergent quarterly margins to approach 10% as we near the end of the fiscal year the scale begins to further mitigate the impact of the continued investments for growth. Turning to PA Consulting. Revenue from PA was up 1% year-over-year in U.S. dollars but up over 11% in local currency. PA once again reported a book-to-bill over 1x. We continue to expect revenue growth in British pounds to remain near or above 10% during the second half of fiscal 2023. Turning to profitability. Q2 operating profit margin for PA was 21.8%, up 370 basis points sequentially due to fixed price milestone achievements and lower incentive costs. As PA continues to take actions to improve utilization, we expect OP margins to be around 20% in the back half, relatively close to their year-to-date OP margin performance. Our unallocated corporate costs were $60 million in Q2, an increase over our previous run rate estimate, driven by inflationary pressure in health care and digital investments. For the full year, we now expect our quarterly run rate for the balance of the year and unallocated corporate costs to be in line with our Q2 level, driven by inflationary pressure in health care costs and incentive costs. Turning to Slide 12 to discuss our cash flow and balance sheet. We posted another strong quarter of cash flow generation which is indicative of the quality of earnings power and cash conversion capabilities. Free cash flow was $97 million, resulting in approximately 100% conversion of net income into free cash flow for the first half of fiscal year 2023. As a result, we are well positioned to deliver our anticipated 100% reported and adjusted cash flow conversion targets for the full year. Regarding the deployment of our free cash flow, we will remain agile and opportunistic in repurchasing shares. We ended the quarter with cash of $1.2 billion and a gross debt of $3.5 billion resulting in just over $2.2 billion of net debt. Our Q2 net debt to 2023 expected adjusted EBITDA of approximately 1.4x is a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment-grade credit profile. As of the end of Q2, approximately 60% of our debt is tied to floating rate debt and our weighted average interest rate was 4.8%. In February, Jacobs completed the refinancing of existing debt and Jacob's inaugural issuance of a $500 million sustainability-linked bond. The bond was priced at a competitive fixed rate and includes a KPI aligned with Jacobs commitment to increase gender diversity and leadership positions and to substantially reduce our greenhouse gas emissions. For your benefit, in the appendix of this presentation, we have 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 increased 13% year-over-year and which will be paid on June 23. With that, I'll now turn the call back over to Bob.

Operator:

[Operator Instructions] We'll take our first question this morning from Jamie Cook of Credit Suisse.

Robert Pragada:

Okay. So maybe I'll start off and then Kevin, I'll turn it over to you. With regards to the second part first, Jamie, we do not see dissynergies with the spin. On the spin, specifically, we were looking for the most optimal tax-free benefit for our shareholders as well as our confidence in the business that it has the credibility and the horsepower to operate successfully as an independent entity. So those were kind of the drivers we're looking to obviously maximize shareholder value. Kevin, anything you want to add?

Jamie Cook:

And then I guess just my other just sort of now that we're sort of splitting the businesses, is there any way you could sort of frame how you think about longer-term or medium-term organic growth or margin targets associated with the different businesses as they sit today?

Kevin Berryman:

Yes. Look, as we talked in the prepared remarks, as we look at the 2 businesses and we talk about 2022 kind of pro forma, if we had done something, we had a 12% margin for the People & Places business, operating profit margin and about 8% for CMS. We think that our spend will ultimately allow the 2 incremental individual companies to focus on their respective opportunities and in a manner that allows for, if anything, an acceleration in growth. I do would like to say that in the event that the spin is able to be executed, we are -- we do realize that there will be some incremental CMS public company costs that would have to be incurred but we will think we'll be able to offset and then some with our opportunities to streamline our 2 organizations.

Andrew Kaplowitz:

Congrats on the announcement. So backlog continues to rise in P&PS. Obviously, there are some cross currents given concerns around private spend but state and local governments, I think, continue to spend -- you've talked about funding ramping from the fiscal bill. So do you see backlog growth continuing there sequentially over time? And can you sustain that 10% year-over-year constant currency growth that you have in the segment?

Andrew Kaplowitz:

And maybe a similar question with CMS. You've got did get a backlog uplift from Kennedy? And I think you mentioned that the pipeline is up double digits. But how are you thinking about backlog and CMS moving forward? What is the risk that that's going to be, could slow down bookings a bit for a couple of quarters?

Operator:

We go next now to Michael Dudas at Vertical Research Partners.

Robert Pragada:

Yes, Michael, just to clarify 1 point. We didn't -- actually 5G and automotive are a part of the CMS segment and that's actually what we were reporting today. So I just want to clarify that point. I would say as far as what stays, what goes, we're early in that process. And so to be direct and to provide clarity, it is the CMS segment today.

Robert Pragada:

No, we're not. We're not. And so I just want to provide clarity on that.

Robert Pragada:

Yes. So on the margins themselves, I mean, I think clearly, it's been a part of our strategy for not just '22 but '19 as well. We are in -- we continue to going up the value chain for our clients. And as we do that and we're getting more into the higher-end consultancy work, we're seeing the incremental effect on our booked margin as far as how that's dropping into the bottom line, I think 2 parts, Michael, that you're highlighting. One is that kind of excellence in project delivery which has been a part of our DNA for decades, that continues to be high on our list on delivering not only to our clients' expectation but within our financial expectation as we're booking these shops. As far as the last part of your question on the timing of that dropping to the bottom line. We're seeing a nice pace in the marketplace. And this kind of goes to all segments of our business. After a period of time, I think, in the beginning of Q1 and maybe in the back half of last year, that was having an effect on our top line and some of our actuals to forecast, that is reconciled back and hence, the performance this quarter. And so all indications that we're getting from our clients is that's going to continue.

Sean Eastman:

First 1 is kind of high level. Just rewinding to the Strategy Day from last year, we kind of got a vibe from that update that you guys were kind of embarking on a deeper integration of the business units with the Divergent Solutions segment kind of being a bridge. And today, we're kind of talking about a more exciting outlook as separate entities. So I'm just curious what changed there. I hope that's a fair question.

Sean Eastman:

Okay. Understood. And then relative to the Divergent Solutions dynamic between investing in growth and kind of releasing margins. Any update post the review you guys did on how you're balancing those 2 things?

Operator:

We'll go next now to Bert Subin at Stifel.

Robert Pragada:

Kevin, why don't you start off from a market standpoint, I'll talk after that.

Robert Pragada:

Well said. Not going to add any comment.

Robert Pragada:

Kevin?

Robert Pragada:

Yes. Just wanted to add -- we really like what we got.

Steven Fisher:

How should we think about the second half '24 timing for the spin? I think that's within the normal range for these types of transactions. But still seems like it's a bit long dated. Is there any potential to accelerate that if it stays a spin? And what are the factors there? Just curious if the debt ceiling discussions and continuing resolutions and federal budget. Is that all a factor? Or is it more just the internal process?

Steven Fisher:

Okay. And then P&PS is going to really be the biggest contributor to profits post spin. So there's going to be a lot of focus on that and particularly the margin. So just looking at the sequential margins this quarter were down in P&PS but up 150 basis points year-over-year. It sounds like you think we should focus on the year-over-year there. But I'm curious about how we should think about mix within P&PS and how might that affect margins on a quarter-to-quarter basis?

Kevin Berryman:

So 1 thing, just to crystallize and make sure that you caught it correctly. Our margins in CMS Q1. Yes. I'm sorry. I'm sorry.

Operator:

We'll go next now to Chad Dillard of Alliance Bernstein.

Kevin Berryman:

So we're early in our process, Chad. We do know that People & Places and CMS both have good cash flow characteristics. Actually, People & Places has a lower DSO level than the current CMS organization. So we're working through all of that. We'll provide incremental details relative to when we get to that space to really give greater clarity. But I think you're going to see both businesses being robust in terms of their cash flow capabilities longer term.

Charles Dillard:

That's helpful. Then second question on PA with respect to the margin. Now you guys talked about operating margins getting to like the 20% range in the second half. But maybe kind of thinking a little bit longer term, just would like to understand what's the path to bring you back to, I guess, what your target range would be?

Operator:

Next now to Michael Feniger of Bank of America.

Robert Pragada:

So Michael, the short answer is no. IIJA, that's where we made specific commentary about that in the script, has really started to incrementalize in our business and we can see it not only in our pipeline but in our bookings. And it's realizing itself in that was -- it's why we specifically called out P&PS Americas on the 30% year-over-year growth. So we're not seeing that at all. And just 1 other -- just a clarifying point on IIJA, it's a law, right? So as far as it being repealed, there would have to be significant -- there have be a new law. And so we feel confident about that. On some of these other items, those were actually in the early stages and we had not even -- we had not seen the effects of those in our pipeline or in our work. So the fact that there's a debate about those now, it's not really having that material effect on the business.

Robert Pragada:

Yes. Interesting, I kind of separated between PA and P&PS. Our PA business in the U.K. specifically is actually growing and it's been really, really strong. And that's kind of a testament to no different than Jacobs historically, real strong capabilities in those areas of global priorities and national priorities and it's around the defense sector that PA has a strong relationship with MOD as well as in energy and utilities which, in fact, is turning into a security issue in broader Europe. So that's really driving the PA business. What's driving the PA and the P&PS business is the energy security issue in the broader Continental Europe as well as in Scandinavia. And I'll give you just 1 statistic. 1 year ago, 2 years ago, of our U.K. platform which you know is really, really strong, about 90% of our folks that were based in the U.K., worked in U.K. business. Today, that's about 60-40 is where we have our talent from the U.K. working on programs and projects and engagements all throughout Europe as well as globally. And that goes into -- Kevin and I have been really vocal about that over the course of the last 3 or 4 years about tying that global talent. So it doesn't totally dampen the effect of some of the economic headwinds in Europe but our diversity is helping in that front.

Gautam Khanna:

Yes. Congrats, Kevin and Claudia. I just wanted to go back to -- I think it was the first question in the Q&A on any sort of dissynergies and I don't mean quantitative necessarily but are there any linkages that CMS and PA or CMS and P&PS, we're able to just be more competitive on bids because you could bid the broader qualifications of the entire enterprise that might be lost and I was also thinking just when PA was acquired, I thought 1 of the thrust was to bring them outside of the U.K. which you just talked about but into the U.S. and into some of the government customers. And does that potential opportunity may be look less optimistic if CMS is not under the same roof.

Gautam Khanna:

And if I might follow up just on the decision to spin versus an outright sale, can you talk a little bit about what the tax basis of CMS would be because presumably, when you announce something like this that potential suitors would also be interested, I would imagine. So what is the tax basis of the enterprise CMS?

Operator:

And we'll take our final question this morning from Andy Wittmann of Baird.

Kevin Berryman:

So look, I'll make my first comment in response to your detailed questions is we remain committed to the Jacobs RemainCo that it's going to be investment-grade rating. So I think that gives you a ground post that you can certainly evaluate what the potential options may or may not look like. The second thing I would say is we're a little bit too early in the process. We have kept this to a very small group of executives and team members up until this point in time. And now we are -- as we publicly announced, we're going to go through a very detailed, thoughtful, disciplined process that will answer all of these questions. I do think that the way we would characterize the leverage factors, they're going to be appropriate relative to the businesses in which they are. So I think I'll just leave it there and I think you can interpret what that may or may not mean. But we think ultimately that there is an ability to have a stand-alone organization that will -- that is now CMS which is going to be -- have an ability to be quite successful longer term and people in places and PA and divergent as well as the RemainCo.

Kevin Berryman:

Well, look, we didn't really comment about CMS, although I think what I would focus on in CMS is really more about the margin, sequential improvement which we think is really important as we get the business back to that level of 8% for the full year which is what we characterized. And so perhaps I'll leave it there because we didn't really talk about the CMS numbers; still growing.

Robert Pragada:

Yes, thank you. It's exciting times ahead. We're really looking forward to what the future brings. Thank you, everyone, for joining the call and we'll be very close to the market continue -- as things continue to develop and progress. Thank you, everyone.

Jonathan Doros:

Thank you. Good morning to all. Our earnings announcement and 10-Q were filed this morning, and we have posted a copy of the slide presentation on our Web site, which we will reference during the call. I'd like to refer you to Slide 2 of this presentation materials for information about our forward-looking statements and non- GAAP financial measures. Turning to the agenda. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and Chief Financial Officer, Kevin Berryman. We are also joined today by our incoming CFO, Claudia Jaramillo. Bob will begin by summarizing highlights from our first quarter results, discuss our commitment to sustainability and then provide an update on our strategy. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks, and then we'll open up the call for your questions. In the appendix of the presentation, we provide additional ESG related information, including examples of our leading ESG solutions. With that, I'll now pass it on to Bob Borgata, CEO.

Kevin Berryman:

Thank you, Bob. Let's turn to Slide 9 for a financial overview of our first quarter results. First quarter gross revenue grew 12% year-over-year and net revenue grew 8%. Net revenue grew 12% year-over-year on a constant currency basis, an acceleration from our fiscal year 2022 constant currency growth of 8%. Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the fourth quarter, but as expected, was down approximately 130 basis points year-over-year, primarily driven by

Operator:

[Operator Instructions] Our first question is from Jerry Revich with Goldman Sachs.

Bob Pragada:

Go ahead, Kevin.

Operator:

The next question is from Andy Wittmann with Baird.

Kevin Berryman:

The focus 2023 to the extent that there is any indications that are really related to the real estate impairment. It's part of our overall Focus 2023 initiative. So it's not over and above the kind of real estate impairments that I highlighted.

Kevin Berryman:

Yes.

Michael Dudas:

Bob, you talked about your drivers, the key drivers in the end markets and how they will be impacted. How comfortable do you feel as you're taking over here how you're positioned from a resource basis to drive that growth, what areas there’d be more tension paid upon? And of the several different end markets that you see, you did touch on some of them in your prepared remarks. But what ones could we expect to see some more better growth, better opportunities for Jacobs not only just to increase the book your bookings, but also drive the higher margin mix that you're anticipating?

Operator:

The next question is from Andy Kaplowitz with Citigroup.

Bob Pragada:

So let me answer the last part first. I think that the infrastructure ramp up is pretty locked in with regards to IIJ. And then the effects that the IRA and the CHIPS Act will be supplemental to that. My comment about the end of the year is that those three will be in real time. So we're feeling comfortable about that four year time line. I think what's also important to understand is that when we -- the difference between the appropriation, the deployment of the funds and capital and then the duration of the projects, programs and engagements, that has a tail on it that's six to seven years. And so you see -- Kevin talked about the backlog growth in revenue being kind of in that mid single digits, but the gross margin being in double digits on a constant currency basis, that's really a function of where we are in the phasing of that work. So comfortable on that front. As far as could that mean incremental growth to what we've already projected in our out year plan, we're feeling strongly that it could really be a big part of the company. So we're optimistic.

Unidentified Analyst:

This is [indiscernible] on for Jamie. So on CMS, I was wondering if you continue to expect low to mid 8% margins for the year? And is there any opportunity to look at divesting underperforming or noncore businesses in CMS and focus more on higher margin businesses, in particular, now with Claudia on board.

Bob Pragada:

If I could add just one item to what Kevin said. When we talk about energy transition, please keep in mind that, that includes components of CMS that’s around our our nuclear new build and the AMR SMR technologies that we have, and we're seeing some real opportunities and growth in Europe that will be contributing to the margin profile that Kevin mentioned.

Operator:

The next question is from Michael Feniger with Bank of America.

Bob Pragada:

Go ahead, and then I'll back you up.

Bob Pragada:

And right now, the programs, Michael, that we're looking at are not totally insulated, but we've got a strong view on those programs being funded here in the near term -- awarded.

Robert Conners:

Well, first off, Bob, if I remember correctly, I'm wishing your birds a good luck next weekend. And I guess for my question, you guys have a lot of tailwinds going into the back half, strong outlook on various end markets. Just sort of wondering what your thinking was with around sort of maintaining the guidance, especially with currency sort of being a tailwind here.

Bob Pragada:

And then, Robert, maybe I'll make a couple of comments on the markets. The reason why we highlighted those four sectors that we did is the tailwinds that we are seeing and it's materializing in the double digit pipeline growth, the backlog growth that we're seeing and our bookings performance, all leading indicators to strengthen those markets. The burn of those bookings is something we continue to monitor very closely. But the stage that we're coming in on those programs are creating a higher level of utilization, specifically in the US for the Jacobs business.

Louie DiPalma:

Congrats to everyone on your promotions and new positions. As it relates to the exceptional strength for advanced facilities for this current fiscal 2023 on top of 2022, Kevin, I think you mentioned how this is [called on]. And I was wondering, should investors expect a consistent long term upward trajectory for advanced facilities with all of the stimulus funding from the CHIPS Act, or will it be lumpy in certain years as funding maybe inconsistent?

Operator:

The next question is from Gautam Khanna with Cowen.

Bob Pragada:

Maybe I'll talk first on the recompetes. Outside of Kennedy, for the next 12 to 18 months, I think that was the time line that you put it at nothing of that size. We have smaller recompetes that are probably a little less under the radar -- a little bit more under the radar. But those are well within the normal cycle of our business. On the CR with new programs, Gautam, that's one where we continue to be very sensitive to that. From a recompete standpoint, those could end up being upside for us, because we're on programs that are continuing to be determined. But I think the diversity of our portfolio has lessened the impact of what we saw historically with CRs. And so I think that's where -- I think it would not be wise of us to predict the effect of CRs. But I think the diversity is where we see the hedge and we feel confident about our business.

Josh Sullivan:

Just to follow up on that a little bit. As far as the NASA Kennedy rebid itself, given so many changes in the space industry and emergence of a lot of commercial space interest, where is your confidence in retaining the work?

Operator:

The next question is from Chad Dillard with AB Bernstein.

Kevin Berryman:

That would certainly be consistent with our strategy. I would say the margin burn that I was referring to is second half oriented primarily. So as we look to beyond 2023, certainly consistent with our strategy, we are always looking for an incremental profit improvement in terms of margin. So yes, that would be consistent with our execution strategy.

Alex Dwyer:

This is Alex on for Sean this morning. So my question, the backlog was very strong this quarter and it looks like all segments grew sequentially from 4Q. You guys had highlighted this gross margin in the backlog was up 100 basis points. Can you guys talk a little bit about what's driving this 100 basis point increase in margin? Is it one or two segments or is it more broad based in all the segments?

Operator:

We have no further questions at this time. I'll turn it over to the presenters for any closing remarks.

Operator:

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

Jonathan Doros:

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.

Bob Pragada:

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 7 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 -- advanced facilities 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 health care and [indiscernible] 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 and 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, [indiscernible] of Energy in 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 living 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 hiccup. Under infrastructure modernization, mega program delivery trends continue as clients look for more efficient ways to deliver sustainable, liveable 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 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 was 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

Bob Pragada:

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 FX rates, we are providing our outlook under 2 FX scenarios

Bert Subin:

Congratulations to both Bob and Steve.

Bert Subin:

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?

Bert Subin:

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 -- as you progress through '23?

Operator:

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

Bob Pragada:

Thank you.

Louie Dipalma:

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

Kevin Berryman:

The other thing, Louis, though, '21 was the high point. So I would say that the underlying business is returning. We had some other events in 2021 that accelerated the margin a little bit higher. We had some one-off closeouts which were pretty strong. But I think in 2023, the underlying is getting back up well into the 8s, I would say. So maybe not all the way back up to the -- I think we were at 9% in 2021 but we're going to get underlying to be quite consistent with 2021.

Michael Dudas:

Maybe for Bob or Kevin, you call out in your CMS the improved in -- the book-to-bill but also the gross margin book-to-bill. Maybe you can talk a little bit about P&PS and PAC in a similar light? Or do you want to give out the actual numbers? And how much is -- as you look into timing of awards and ramp up and some of the utilization issues that you or fit in '22, is that more of mid- to later '23 to show some much better for FX better growth as we move towards the end of '23?

Michael Dudas:

So first, Kevin, I'm just talking about like your book to bill, you talked about the CMS gross margin book-to-bill. Maybe you could highlight in PP&S [ph] and PAC similar just the observations relative to what's in backlog, what do you anticipate in new orders? And maybe the timing of those orders relative to your outlook for 2023?

Operator:

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

Steve Demetriou:

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 3 accelerators; and so obviously [indiscernible]. 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.

Operator:

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

Steve Demetriou:

Thank you.

Jerry Revich:

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

Operator:

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

Kevin Berryman:

Maybe I'll make some comments first and then have my partners here add any additional commentary to think appropriate. So look, I think we feel pretty good about the continuing resolution, given the makeup of the Senate and the House and how that's going to be coming together. And we just had a really deep dive review from a government relations team feeling pretty good about how things are going to play out over the course of this quarter. So we don't believe that there is going to be a continuing resolution that extends well into 2023. We're hoping that that will become resolved near the end of the calendar year. So I think that we're already starting to see, regardless of that continuing resolution, some momentum building relative to what Bob alluded to as -- and I made some comments on in terms of the cyber and intelligence business starting to get unlocked relative to bids being awarded and whatnot. So, we think that the combination of those 2 things are embedded into our guidance. And I feel -- we feel pretty good about it actually.

Andy Kaplowitz:

Steve and Bob, congratulations.

Andy Kaplowitz:

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 when you mentioned to 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?

Bob Pragada:

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

Sean Eastman:

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?

Operator:

Your next question comes from Chad Dillard with Bernstein.

Bob Pragada:

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

Bob Pragada:

Okay. Infrastructure, was that -- that part?

Bob Pragada:

Yes, got it. Okay. In infrastructure, the opportunities continue to grow. I'd say broadly driven mostly in the U.S. but we're seeing this and Steve talked about the international -- I'm sorry, Kevin talked about the international business but heavily geared towards transportation and water with a growing profile around energy transition. And so those are kind of the 3 main areas. Environmental continues to be robust. So, we see those -- I mean, the pipeline growth I talked about before, has been really, really strong. On the acquisitions, that's a business where StreetLight Data probably was the last -- the one that we did, it was a smaller acquisition. And we are immediately seeing fit that we had anticipated in the deal kind of thesis around StreetLight all around that data-enabled [indiscernible] data in driving a different type of solution for our clients. They had clients before, predominantly the state DOTs in the U.S. but that's been expanded with our relationships. And then we're seeing private sector utilization too, as private sector firms have looked at the use of data in order to cite different investments that they're making from a capital project perspective; so very positive news on that front.

Michael Feniger:

I believe you're guiding 2023 growth mid-single digit or high single digit on a constant currency basis. You're citing some really robust sectors, EVs, life sciences, reshoring, hydrogen, autonomous. So what isn't growing that fast in the portfolio? Does it just take longer? Is there momentum the project [indiscernible]? Does organic growth profile actually reaccelerate further in 2024? And in 2024, 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?

Bob Pragada:

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

Gautam Khanna:

Congrats, Steve and Bob.

Gautam Khanna:

I wanted -- just following 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?

Kevin Berryman:

The only one that -- we've called out the one at Kennedy which is -- that's a big one but we feel good about our position there.

Andy Wittmann:

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 was that -- 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?

Operator:

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

Kevin Berryman:

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.

Operator:

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

Steve Demetriou:

Thank you.

Operator:

Good morning. My name is Rob, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Jacobs’ Fiscal Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Jonathan Doros, you may begin your conference.

Ken:

Steve will begin by reviewing our third quarter results, and then discuss our Jacobs and PA accelerating social impact. Bob will then review our performance by line of business, Ken will provide an update on PA Consulting, and Kevin will provide a more in-depth discussion about financial metrics as well as review of our balance sheet and cash flow. Finally, Steve will provide details on our updated outlook along with some closing remarks and then we’ll open the call for your questions. In the appendix of this presentation, we have provided 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.

Bob Pragada:

Thank you, Steve. Moving on to Slide 7 to review Critical Mission Solutions. The CMS business continued its strong performance in the third quarter with total backlog increasing 7% on a reported basis and reported on a pro forma basis to $10.2 billion. Our CMS strategy is focused on creating resilient, recurring revenue growth and market expansion by offering technology enabled solutions aligned to critical national priorities. Our service and solution offering are delivered across our core customers markets, space, national security, cyber intelligence, and energy environment and we are leveraging our growth accelerators of data solutions, climate response in Consulting and Advisory to catalyze the business. We have substantial revenue visibility as approximately 85% of CMS’ portfolio consists of large enterprise contracts with durations greater than four years and 88% from federal level government funding. Although economic and geopolitical uncertainties continue, our strong Q3 ending backlog gives us confidence in our next 12 months forecast of revenue. Three market trends that we see contributing to our continued growth include space debris management, robotics, and 5G network build out. Beginning with space debris management, decades of space travelers resulted in large amounts of space debris damage to the satellites and future launches, adding to the cost of operating satellites and other space platforms like the International Space Station or ISS. If debris destroys a satellite, it can take months and cost hundreds of millions of dollars to restore its service. We support the orbital debris tracking program at NASA and provide plume analysis and communication systems, simulation for vehicles visiting the ISS. In addition, we provide media tracking data for multiple government agencies. Space debris tracking is one of many services Jacobs provides on the recently awarded Johnson Engineering, Technology and Science or JETS II contract with builds on Jacobs more than 17 years of continuous support at Johnson Space Center. Under this contract, we will provide multidisciplinary technical services to support the future of human space exploration, as well as help NASA incubate the emerging commercial space economy. This 10-year $3.9 billion win will book in Q4 and represents a $1.8 billion increase to our existing contract. This serves to illustrate the continuing strong, massive Jacobs partnership. Moving on to robotics. We are increasingly delivering valued solutions to our clients by utilizing robots that reduce costs and increase accuracy and safety in otherwise manual human processes. And we're excited to announce the last quarter we integrated the Resolve robotics team in the UK into CMS, who brings software expertise and IP to help accelerate our growth. Our existing CMS robotics team already delivers groundbreaking innovations, developing and deploying robotics systems in challenging environments such as the robotic tool to retrieve sand like debris from inside a damaged nuclear reactor at Fukushima in Japan, autonomous systems to map riverbeds for the British army, and designing robotic systems for ITER, the world's largest fusion power experiment. Finally demand for 5G telecommunications. Our telecom group provides full solutions for the deployment of next generation wireless and wireline networks for leading telecommunication companies like AT&T, Verizon and T-Mobile, as well as Fortune 1000 healthcare and commercial companies looking to build their own 5G networks. We also support the infrastructure market providing 5G integration, network optimization, and technical services alongside our PMPs teams to accelerate growth. While rollout of 5G infrastructure deployment is still in its early ramp phase, we continue to see increased demand for both integrated 4G and 5G solutions from our commercial telco infrastructure, healthcare and government clients. During the quarter, our telecom group added several new awards, total more than $150 million to deliver projects advancing 5G nationwide. We are excited for the team's recent successes and are well positioned for growth as adoption of 5G use cases and penetration growth. In summary, we continue to see solid demand for our CMS solutions. Last week, we were notified that we were awarded a $470 million, six-year cyber and intelligence related task order, which we expect to benefit and begin ramping at the end of this current quarter. The sales pipeline remains robust with the next 24-month qualified new business pipeline at approximately $25 billion, including $10 billion in source selection with an expanding margin profile. Turning to Slide 8, during the quarter, People & Places Solutions delivered record setting, quarterly bookings that topped pre-pandemic levels. We also enjoyed year-over-year bookings growth of 11% and backlog growth of 13%, delivering a high mark for operating profit in the quarter. Despite macroeconomic concerns, we performed well due to the balance of public and private sector clients with a multinational focus, resulting in continued high percentage of revenue already booked in backlog. As I talk about the quarter, I'll address our four ongoing themes of supply chain diversification, infrastructure modernization, climate response, and data solutions. Starting with supply chain diversification. With continued breakthroughs in biotechnology, strong customer demand and robust operating cash flow, life sciences clients are investing in manufacturing expansion and contract operations capacity globally. As a leader in the market, tier one clients have confidence in Jacobs ability to deliver highly complex Greenfield and expansion projects at speed that provides time to market for our clients, that maximizes their competitive advantage in new therapeutics. Growing health service needs are leading to innovative approaches to care. We are optimizing facilities for clients, such as the University of Iowa Hospitals and Clinics, where we serve as their project delivery partner. We are improving sustainability access and energy efficiency for NHS Scotland, as well as increasing much needed access to critical mental healthcare in Australia. We continue to see robust demand for semiconductor chips, data center capacity expansion, and growth in the electric vehicle market and have secured recent confidential wins in all three categories. On top of strong secular demand for semiconductors, we are pleased to see the passing of the $53 billion U.S. CHIPS Bill, which will incentivize investment in U.S. semiconductor manufacturing and specialized tools. Infrastructure modernization. Increased client investments in mega and giga scale infrastructure continues, and with our number one ENR ranking in program management, our delivery reputation has been a key differentiator in staying ahead of our client's needs in a dynamic global environment. We recently have been awarded several strategic full lifecycle programs for new transformative scale cities in the Middle East that will address social, economic and climate priorities, and we'll have flexible and long-term contracting vehicles. With a renewed interest in equitable, sustainable transportation, we are experiencing a significant investment in the transit and rail sector with wins across the globe, such as Irish Rail, British Railways, multiple clients in Australia and resilient transit planning for Sacramento area Council of Governments here in the U.S. The infrastructure investment in JOBS Act is resulting in a steady increase in new project awards to modernize and increase the resiliency of U.S. infrastructure. For example, we won a major water supply resilience program for Eastern New Mexico Water Utility Authority, a five-year storm water implementation program for the City of Baton Rouge, and a funding strategy with Oklahoma DoT. Additionally, our IIJA advisory team is positioning our clients to win funding opportunities with over 50 differentiated grant applications across transportation, water, and energy. We anticipate additional awards in the coming quarters as the opportunities in our sales pipeline move into the next phase of procurement. Moving to Climate Response. We see our clients continuing to invest in clean energy across all sectors with primary spend related to grid modernization, cost effective renewable energy generation and EV Charging Infrastructure or EVCI. Our progress in these areas is demonstrated globally. In Asia through advisory and policy consulting for the Asia Development Bank, in Canada with a pipeline utility program, in Australia through transmission and distribution design projects with AusNet Services, and in the U.S. via New Consulting and Advisory framework to advance energy transition with a leading provider. Transportation electrification and advanced charging infrastructure plans have topped our clients’ agendas across all regions for aviation, ports, highways and rail and transit. This includes projects for Heathrow Airport in the UK to implement landside EBCI, Ohio DoT Statewide EV Infrastructure program, and a major U.S. Transportation Authority transitioning operations to zero emissions for one of the world's largest bus fleets by 2040. Collectively, this is a very exciting space for us and aligns strongly with our climate response accelerator. Moving to Data Solutions. We are using advanced data analytics to optimize our clients’ decision making as well as their ability to de-risk long-term investments. For example, in collaboration with the California Air Resources Board, our StreetLight Data team is using advanced analytics to better measure and manage transportation emissions. We are also continuing our technology consulting support for a U.S. State DoT with integrated corridor management, connected automated transportation systems, and other advanced mobility solutions to maximize use of their existing transportation infrastructure. In the water market we are awarded a contract with the Water Research Foundation to develop the first full scale deployment of machine learning, predictive control for wastewater systems, a new technology to advance the global water industry. Our Cyber and Digital Services teams were awarded projects in support of the Operational Technology Resiliency plan for a major UK utility network operator. And in Australia, we have secured the Digital and Data Advisory Services scope to support advanced analytics across Brisbane City Council's entire asset lifecycle. In summary, our strong sales pipeline is supported by well-funded government budgets to modernize their infrastructure and commercial clients that are addressing secular growth opportunities. The agility of our global workforce, combined with elevated spend on transformative, complex infrastructure, uniquely positions us to deliver differentiated value to our clients. Given these dynamics and the visibility of our revenue in backlog, we are excited in the growth trajectory for our People and Places business, both now and into the future.

Ken Toombs:

Thanks Bob. Moving to Slide 9, PA's current quarter continued to see strong sales bookings up 25% and backlog was up 19% in constant currency. Here's what I see driving that. We've unique value proposition that starts with our purpose, bringing ingenuity to life to build a positive human future. This enables us to deliver both , but our purpose is critical in our ability to attract and retain top talent. Our differentiation extends to our strategy, which is focused on helping clients address some of the biggest forces shaping society with our unique end-to-end innovation offering. Indeed having technologists, scientists, engineers, and designers working together creates a unique set of propositions. Let me shift gears and talk a bit about our partnership with Jacobs. As Steve mentioned, our partnership supports key aspects of our strategy. We have numerous key accounts in common. Those accounts are ones where we can leverage PA's relationships at the C-suite to bring Jacobs into the mix early and create a differentiated solution. In some cases it could be the advantage of scale that Jacobs has or a specialized expertise. It can also work the opposite way where Jacobs has a key relationship and brings PA into complex deals. A great example is PG&E in California, where Jacobs has a strong existing relationship. The differentiation on this project was a combination of Jacob's program management expertise with PA’s strategic consultancy advice and deep domain expertise. And more than a year into the partnership, these types of opportunities are growing. Another area of our strategy is expansion in the United States, where the outlook is very promising with strong double digit revenue growth over the last six months. Beyond the synergies with Jacobs, we see a big demand for our end-to-end services. We're focused on three sectors in particular, energy and utilities, health and life sciences and consumer and manufacturing. In each of these areas we're winning and delivering exciting purpose-driven work. For example, innovating cell and gene therapy manufacturing with Ori Biotech and creating a growth strategy for Green Boom, a startup, which has developed a sustainable way to prevent, reduce and clean up oil spills. Over time we’ve made several U.S. acquisitions which have provided a platform for further organic growth. Additionally, the significant hiring of great new talent at the partner level is another way we are stimulating growth. Since the beginning of 2020, we've grown the number of U.S. partners by 60%. Now I'd like to spend a minute on resiliency of our business. We enjoy a loyal client base with approximately 90% of revenue typically coming from repeat clients over the last five years and our expertise continues to be in high demand. We also enjoy resiliency, given our balance in private and public sector work. For example, during the pandemic, we transformed entire corporate business models to account for new customer behaviors. While in the public sector, we work with some of the biggest government agencies that provide critical services that are largely unaffected by short term budget decisions, like the UK National Health Service and Ministry of Justice. This helps to mitigate risk from future macroeconomic trends. So to summarize, we're running a purpose-driven business with a clear strategy to address our clients’ biggest challenges in an end-to- end manner that separates us from the competition. And structurally we're set up to be able to pivot in response to external factors, ensuring we're well positioned for the future. Kevin, I'll hand it over to you.