Jacobs Solutions Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Jacobs Fiscal First Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jonathan Doros, Investor Relations. Thank you. Please go ahead.

Thank you. During this presentation, we will be referring to certain non-GAAP financial measures. Please refer to slide two of the presentation for more information on these figures. In addition, during the presentation, we will discuss comparisons of current results to prior periods on a pro forma basis. See slide two for more information on the calculation of these pro forma measures. For pro-forma comparisons, current and prior periods include the results of the Wood Nuclear business, which closed in March 2020, and Buffalo Group, which closed in November of 2020. We have provided historical pro-forma results in the appendix of the investor presentation. Turn to the agenda on slide three. Speaking on today's call will be Jacobs Chair and CEO, Steve Dimitria, President and Chief Operating Officer, Bob Pergata, and President and Chief Financial Officer, Kevin Barron. Steve will begin by updating the progress we're making against our strategy and reviewing our commitments to ESG and sustainability solutions. Bob will then review our performance by line of business, and Kevin will provide some more in-depth discussion of our financial metrics, followed by an update on our Focus 2023 integration efforts, as well as a review of our balance sheet and cash flow. Finally, Steve will provide a detail on our updated outlook, along with some closing remarks. And then we'll open the call for your questions. With that, I'll now pass it over to Steve Demetrio, Chair and CEO.

Thanks, John. And thanks, everyone, for joining us today to discuss our first quarter fiscal year 2021 business performance and strategy update. It's been about a year since the pandemic started, and we hope everyone is safe and healthy as COVID-19 continues to impact all facets of our daily lives. At Jacobs, in addition to keeping our people safe, we're continuing to support national governments and industry in their production and distribution of critical vaccines. Turning to slide four to discuss our first quarter results, it's important to review our strategy, which is foundational to an investment in Jacobs. We believe the transformation that Jacobs has undergone over the last several years has created a compelling multi-decade investment opportunity for our current and potential shareholders based on three key tenets. First, we have transformed our culture, aligned around a common purpose of creating a connected, sustainable world, underpinned by strong values of we do things right, we challenge the accepted, we aim higher, and we live inclusion. This culture permeates through our more than 50,000 people, the solutions we deliver for our clients, and the engagement in our communities where we live and work. Our purpose-driven culture has also enabled us to quickly adapt to changes in market conditions, while also staying focused on our long-term vision of being a technology-enabled solutions provider. Second, we have a portfolio of solutions aligned to a diverse set of global opportunities, such as space exploration, cyber readiness, climate change, and modernizing and digitizing our infrastructure. Our thematic growth areas are global, allowing us to address them efficiently, effectively, and competitively at scale through our integrated global platform of technology, our talented resources, domain expertise, and enhanced brand awareness. Finally, our Jacobs management team has demonstrated the ability to strategically allocate capital, including successfully executing acquisitions. Our continued focus on strategy and execution has resulted in a strong start to fiscal 2021, even while continuing to manage the headwinds from the global pandemic. First quarter net revenue increased 3% year-over-year and adjusted EBITDA grew 8%. Our backlog ended the first quarter up 11% year-over-year and up 7% on a pro forma basis. Given the strong momentum, we're increasing the midpoint of our full fiscal year of 2021 adjusted EBITDA and EPS outlook. Our cash flow generation was strong during the first quarter, and our balance sheet remains healthy. In the near term, we do expect to deploy excess cash toward paying down debt. Last quarter, we announced a strategic majority investment in PA Consulting. and we are happy to share that the transaction was overwhelmingly approved on February 4th, with 99.8% of PA shareholders voting in favor of their transaction. Particularly exciting was the fact that the voluntary election for management rollover was fully subscribed, and new partner hiring has also been very successful post-announcement, indicating the enthusiasm and commitment of PA partners and employees about the future growth opportunity of this partnership. Confirmation of the scheme of arrangement is awaiting regulatory approval by the Financial Conduct Authority in the UK, and we expect to close the investment by the end of this current quarter. PA's performance for calendar 2020 exceeded our expectations, and their pipeline of strategic and technical consulting work continues to grow. This includes a new engagement with the UK's Department of International Trade advising on Project Defend and UK supply chain resilience to underpin economic and national security, along with reaching a key milestone with the National Institute for Health Research, where they completed a UK public sector first delivery of Google Cloud Search to upgrade research platforms. Once we complete the transaction, we expect significant benefit for the clients of our firms, driven by the complementary solutions offering of PA and Jacobs. Now, looking further into fiscal 2021 and beyond, we believe Jacobs has a compelling organic growth opportunity. And as appropriate, we will further accelerate that growth through thoughtful strategic acquisitions that offer a higher return versus our alternative of repurchasing shares of Jacobs. Turning to slide five, I'd like to review some recent ESG actions. As a company, we're committed to delivering results to all our stakeholders, our employees, our clients, our investors, and our communities. Delivering on this includes our commitment to our sustainability strategy called Plan Beyond and our Climate Action Plan launched last year. I'm pleased to report that we achieved a net zero carbon, including 100% renewable energy for our operations of 2020. and our carbon reduction targets have been formally approved by the Science-Based Target Initiative. The climate agenda will continue to be front and center in 2021, with the United States rejoining the Paris Agreement and the 26th UN Climate Change Conference of the Parties, or COP26, being held in November. In support, Jacobson announced our Pledge to Action, a campaign inviting our clients and suppliers around the globe to take measurable actions to tackle climate change before the opening of COP26. And we are also leveraging the power of our Jacobs people in making a positive impact. We launched our Climate Countdown Challenge, where employees can join a new mission each month to tackle the climate crisis. Through both of these initiatives, we hope to raise awareness, inspire and motivate individuals and companies and demonstrate the collective power of organizations taking actions now to make an impact for generations to come. Moving to slide six. At Jacobs, we intend to lead from the front in the transformation to a net zero economy. In combination with the COVID-19 pandemic, climate change remains the major global driver for ecological, social, and economic disruption, impacting every person, community, business, and governments around the world. It's also a major disruptor, advancing technology-enabled innovation and sustainable business models for addressing decarbonization, the global energy transition, and resource scarcity. Jacobs is uniquely positioned to support our clients and communities in developing and deploying solutions and technologies across the full spectrum of decarbonization efforts, including renewable energy and clean power, carbon capture and storage, energy efficiency and energy storage, green buildings, sustainable transport, circular economy, carbon management mitigation and compliance consulting, as well as adaptation and resilience for all facets of infrastructure. This includes developing technology solutions, like our recently announced launch of Jacob's Travel Service Optimization Solution, which transforms the home-to-school travel experience for special educational needs and disabilities children and young people. This solution combines our deep domain knowledge with the latest advances in data analytics to determine the most efficient ride-sharing experience while supporting decarbonization and our long-term transition to a net zero economy. With that, I'll turn the call over to Bob Fregata to provide more detail by line of business.

Thank you, Steve. And now, moving on to slide seven to review the quarterly performance for critical mission solutions. During the first quarter, our CMS business continued its strong performance despite the continued high levels of COVID-19 cases. Our workforce and clients have addressed the primary challenges of physical distancing and continue to execute on our contracts, regardless of work location, at approximately 95% of normal operating levels. Total CMS backlog is at $9.7 billion, representing a 14% year-over-year growth and up 4% on a pro forma basis. The CMS strategy is focused on both revenue growth and margin expansion by aligning to our go-to-market strategy towards critical national priorities of digital modernization, strategic data utilization, lower orbit satellites, hypersonics, and cyber. I'll discuss each in greater detail. Beginning with digital modernization trends, our global government clients face the current task of transforming their digital stack of information. communications, and security systems in order to maintain their national security. We are on this transformation journey with our clients as we develop and operate their next-generation digital systems. In December, we cleared the protest period on the Navy's Kings Bay Intelligent Asset Management Award, and we were awarded another new digital modernization project for the Army's Intelligence and Security Command. In addition to digital modernization, a second key growth driver for our business is the DOD's increased focus on strategic data utilization. The DOD is becoming a data-centric organization, combining edge computing with data intelligence and analysis at hyperspeed and scale. Data is considered a strategic asset similar to the priority given to weapons systems, and it is increasingly central to warfighter advantage in and out of theater. As an example, Our intelligence surveillance and reconnaissance team was recently awarded a seat on the 10-year, $950 million ceiling IDQ to provide various unmanned aircraft solutions and satellite payload services for the Air Force's Advanced Battlefield Management System. ABMS allows a joint force to use cutting-edge methods and technologies to rapidly collect, analyze, and share intelligence information and make decisions in real time. Moving on to low-Earth orbit satellites. These satellites play a key role in advanced communications, military reconnaissance, intelligence, and other imaging applications. Jacobs began a new era in advanced space radar payloads with the successful launch of its Mangle-1 satellite. Our approach enables government and commercial customers to proliferate space-based sensors that see in the dark and through clouds to provide near continuous monitoring, gathering valuable, actionable intelligence in the ground, sea, air, and space domain. And now on to hypersonics. Hypersonic offensive and defensive weapons technology is unquestionably one of the highest priorities for our government clients. Jacobs threw his decades of supporting the Air Force and NASA as a clear leader in hypersonic solutions. During the quarter, CMS was awarded a hypersonic test cell contract from the Air Force at Arnold Engineering Development Complex to transform the facility into a unique, large-scale, clean-air, variable Mach number test facility with extended runtime capability. A final trend is to discuss cybersecurity. The recent solar wind sunburst advanced persistent attack continues to make headlines, giving us sophistication and dwelling time. In fact, the Biden administration has requested a $9 billion-plus increase in spending for cyber and modernization. And, as mentioned on our call last quarter, the British government also approved its largest military investment increase in 30 years by £16.5 billion, or 10% per year, over the next four years in defense areas. including cybersecurity. CMS's cyber and intelligence business has grown over the past several years to more than 3,300 professionals today. Part of our growth strategy is to continue to add adjacent capabilities and customers. The Buffalo Group acquisition, which closed in November, posted strong initial performance and is a catalyst for achieving immediate scale and deep client access with a strong majority of the U.S. intelligence agencies and combatant commands. In summary, we continue to see strong structural demands for our solutions. Supporting this, the CMS sales pipeline remains robust with the next 18-month qualified new business pipeline remaining above $30 billion, including over $10 billion in source selection and an increasing margin profile. Now on to slide eight. I'll discuss our people and places solutions business. Last quarter, we conveyed optimism around our balanced portfolio and our ability to remain resilient through economic and geopolitical volatility. This is demonstrated by strong P&L performance in the quarter, as well as 9% year-over-year backlog growth. After a steady pipeline in 2020 and momentum in government funding strategies, timing remains uncertain in our focus geography, such as in the U.S. and U.K. We anticipate further improvement to our pipeline as governments solidify their budget. I'll discuss four trends impacting the macroeconomic environment and our sectors, all of which we are well positioned to capitalize on. First, climate change and decarbonization of the economy, driving sustainability and resilience for public and private entities. Second, economic stillness for long-term job growth and economic relief. Third, the pandemic. and continued growth in health, life sciences, and cloud computing. And four, modernization of infrastructure and the digitization of the industry. Beginning with climate change and the decarbonization of the economy. The environmental sector is experiencing growth as governments, the investment community, companies, and citizens confirm their commitments to climate action, act on their decarbonization agenda, and increase focus on PFAS and emerging contaminants. We generated the largest growth in this sector year over year and anticipate our investment in PA Consulting to further strengthen our decarbonization solutions offering. These solutions, such as advising our clients on their climate action goals, developing strategy and policy, assisting in program implementation, and providing intelligent asset management, are embedded in all our geographies and sectors. A great example of this is our recent win in Orange County, Florida. to develop innovative, resilient, and sustainable waste management systems to reduce greenhouse gas emissions from operations for cleaner electricity use. Recent awards for the Marinus Link electricity interconnector, linking the states of Victoria and Tasmania in Australia, and a project to connect one of the world's largest lithium-ion batteries, are key elements supporting Australia's renewable energy transition. In the Middle East, where we're the program manager to Expo 2020 Dubai, The sustainability pavilion, known as Terra, premieres this month. Leveraging our industry-leading sustainability expertise, Terra is designed to be a net-zero carbon driving during full operations and provides a glimpse of what is to come when Expo fully opens later this year. Next, I'll discuss economic stimulus spend aimed at long-term job growth and economic relief. In the U.S., the current administration is pursuing an aggressive agenda that aligns directly with the long-term growth of our markets. We have every reason to believe that focus will continue as the administration and Congress address COVID relief, climate change, environmental justice, resilience, and the need to create long-term job growth and economic recovery through infrastructure modernizations. As activity on these issues progress, we anticipate funding to support our clients' projects at the federal, state, and local level, which we are uniquely positioned to support through long-term historical framework agreements. In the UK, we are well positioned for stimulus and a leveling up agenda to rebalance the economy across the country and are supporting our clients with smart, integrated solutions with tangible social, environmental, and economic benefits for the communities they serve. In our Asia-Pacific geography, particularly in India, Singapore, and Australia, we expect an infrastructure-led economic revival around transportation and green recovery, largely centered on large-scale renewables and energy to catalyze the economy over the coming year. Moving to the impact of the pandemic and continued growth in health, life sciences, and the cloud computing supply chains. COVID vaccine production is progressing to increase capacity and distribution, as well as increased demand from contract manufacturing companies with an acute focus on biotechnology. And we expect our investment in PA Consulting to strengthen our end-to-end delivery in this sector. Demand for cloud computing continues to drive our data center business globally. We remain agile and are diversifying our client base to adjust to market trends in semiconductor manufacturing. Building on established relationships and industry leading leadership, we are in the negotiations for several new life sciences and electronics projects. In the built environment sector, we are gaining momentum with our clients focused on the global healthcare crisis. We were selected to lead the programming initial engineering efforts for a new campus for the University of California Davis Health Center, as well as the Royal Prince Alfred Hospital redevelopment in Australia. where investment in technology and physical infrastructure support new trends in virtual care. Finally, I'll talk about modernization of infrastructure and the digitization of the industry. Infrastructure modernization remains a priority investment across all sectors and geographies. Transportation continues with a heavy focus on highways and rail. We were awarded the Engineering Services Project for the Houston Metro Inter-KD Bus Rapid Transit System, as well as the new Rapid Transit Project in Southeast Asia that will enable the workforce to adapt public transport, representing another example of how we support our clients with solutions that improve sustainability of our cities and places. Water sector trends are steady with implementation of digital technologies and a focus on the water-energy nexus and resiliency. Using Replica, Jacobs' proprietary digital twin platform, we developed a digital twin of the watershed for Las Vergenes Municipal Water District in California for the evaluation of water supply scenarios while balancing water quality and operational resilience. In summary, the foundation of our P&P business remains strong, with our long-term client base and frameworks in place to move rapidly when government funding is solidified. Positioned extremely well for the near-term secular trends, we expect a steady growth trajectory with profitability improving as we continue to move higher on the value chain. I will now turn the call over to Kevin to discuss our financial performance in more detail.

Thanks, Bob. And now turning over to slide nine. First quarter gross revenue increased 1% year over year with performing net revenue flat. Revenue for CMS increased 3% on a performa basis, and PMPS net revenue was down 3%. The PMPS decline was mainly attributed to slower revenue burn, although the outlook for the business remains strong with backlog of 9% year-over-year. In the near term, we expect reported net revenue growth to be flat to up slightly year-over-year, then gain additional momentum in the second half of fiscal 2021. Adjusted gross margin in the quarter as a percentage of net revenue was 23.1%, down 110 basis points year-over-year. The lower gross margin on a year-over-year basis was driven primarily by two factors, a tough compare from Q1 2020 that benefited from a favorable impact from lower benefit costs carried in corporate, and a higher mix of CMS revenue, which carries lower gross margins but also has a lower G&A as a percentage of revenue. P&PS gross margins increased on a year-over-year basis by almost 100 basis points as we benefited from a mix of higher margin revenue from acquisitions and new business wins. P&PS gross margins saw some modest pressure in Q1 due to a higher amount of America's program management and O&M revenue. Lower consolidated G&A as a percentage of net revenue of 170 basis points year-over-year to 13.6%. more than offset the gross margin impact. As it pertains to G&A, the first quarter continued to benefit from our ability to proactively manage our cost structure. The CMS mixed benefit previously stated and some focused 2023 savings from lower real estate costs, lower travel, and lower COVID-related employee medical costs. As we look forward, we will continue to be disciplined in the management of our G&A cost. GAAP operating profit was $214 million and included $22 million of restructuring, transaction, and other charges, the majority associated with our recently announced FOCUS 2023 initiative, and $23 million of amortization from acquired intangibles. Adjusting for these items, adjusted operating profit was $259 million, up 10%, with both lines of business posting double-digit percent increases in operating profit. As a result, our adjusted operating profit to net revenue was 9.5% of 60 basis points year-over-year on a reported basis. Cap net earnings and EPS from continuing operations were $257 million and $1.96 per share and included a benefit of 54 cents driven by mark-to-market adjustments for our worldly equity stake, a 47-cent benefit related to a mark-to-market investment in AI software provider C3AI, 16 cents per share of after-tax charges primarily related to Focus 2023 and other restructuring costs, a 17-cent charge related to the impairment of our AWE management investment, and amortization of acquired intangibles of 13 cents. Excluding these items, second quarter adjusted EPS was $1.41, up 17%. Let me provide some detail on our investment in AI software provider C3 AI. In 2010, we made a small investment in the company, which recently completed an IPO. Today, our investment represents more than 750,000 shares in the company. Due to our lockup requirements surrounding our ownership, we applied a discount to the quarter-end value of our interest in the company, resulting in the investment valued at $85 million on our quarter-end balance sheet. At today's price, our interest represents a greater than 20 times return on our original investment. Q1 adjusted EBITDA was $280 million and was up 8% year-over-year, reaching 10.3% of net revenue. Finally, turning to our bookings during the quarter, our pro forma book-to-bill ratio was 1.2 times for Q1, driven by strong book-to-bill in PMPS. From a pipeline standpoint, we continue to grow the CMS pipeline, both on a pro forma and reported basis. The timing of when this robust CMS pipeline will convert into backlog is weighted more towards the second half of fiscal 2021, resulting in our projected backlog exhibiting year-over-year growth for the year. The PNPS overall sales pipeline has increased as well, driven by a pro-environmental Biden administration, broader potential infrastructure stimulus in the U.S., and an improving economic outlook. The exact timing of when many of these new stimulus-related opportunities will convert to bookings will become clear over the coming months and will help support backlog growth for the year. Regarding our LOB performance, let's turn to slide 10. Starting with CMS, revenue was up 9.5% year-over-year and up 3% on a performer basis. CMS operating profit was $110 million, up 22%, and up 15% year-over-year on a performer basis. Operating profit margin was up 90 basis points year-over-year to 8.5%. The improvement was driven by our strategy to focus on higher margin opportunities, such as our recent NORAD win, which is now fully ramped. We also saw some additional benefit from favorable project closeouts. As we progress through fiscal 2021, we expect low single-digit CMS-reported revenue growth as we approach the one-year anniversary of the Wood Nuclear acquisition and continue to ramp new wins, more than offsetting the revenue headwind from fully transitioning up to large, lower-margin projects previously discussed, which account for a nearly $600 million headwind in annual revenue in 2021. Given the strategy to capture higher-value businesses via both acquisitions and organic efforts, we continue to expect reported and pro forma operating profit growth to be up double-digit year-over-year. Moving to PMTS, Q1 net revenue was down 3% year-over-year, driven by a lower short-term burn rate as bookings growth remained strong and backlog was up 9% year-over-year, with a 1.3 times book-to-bill. We continue to see solid revenue growth in our America's business offset by some timing-related slowdown in our advanced facilities and in Europe and Middle East businesses. P&PS operating profit was up 10% year-over-year, and as a percentage of net revenue was 13.7% for the quarter, up 160 basis points year-over-year, driven by disciplined management of G&A costs. Looking forward, we continue to project P&PS revenue to be at low single digits for fiscal 2021 with improving year-over-year growth as we progress through the year. We expect operating profit margin as a percentage of net revenue to moderate from Q1 levels, but still increase from fiscal 2020 driven by strong operating profit growth. Our non-allocated corporate costs were $47 million for the quarter. While this figure was supported by strong cost discipline, we continue to expect our non-allocated corporate costs to be higher year over year, driven primarily by inflation and medical costs, enhanced employee benefits, and increases in discretionary medical procedures that were put on hold during fiscal 2020 and the first quarter of 2021 due to COVID-19 concerns. Now, I'm turning to slide 11. I'd like to update you on our Focus 2023 and M&A integrations. We continue to make strong progress on our strategic initiative, Focus 2023, that we believe will, one, lead to enhanced employee and customer experience, two, improve our ability to capture emerging high-growth margin opportunities, and three, drive a more efficient cost structure through increased automation and process alignment for overall longer-term profitability. During the quarter, we incurred an additional $10 million charge and cash outflows of approximately $30 million related to our Focus 2023 initiative. These investments were mainly related to improving the utilization of our physical spaces, deploying new tools and technology for better efficiency in our business, and strategically leaning out the organization. Turning to our recent acquisition of the Buffalo Group, the company had a strong quarter with double digit revenue growth. We continue to expect that the acquisition will deliver eight to 10 cents adjusted EPS accretion during fiscal 2021. Regarding PA consulting, we are pleased with the preliminary results for calendar year 2020, which are tracking ahead of our expectations. We're also optimistic about their calendar year 2021 growth plan, And after the transaction closes later this quarter, we look forward to discussing their results and growth plan in more detail. We continue to expect 52 to 57 cents of adjusted EPS accretion from PA Consulting for fiscal 2022. And finally, when including all integration and restructuring initiatives, as well as the AWE charge, but excluding PA Consulting, we now expect a total of approximately $100 million of P&L charges and $110 million in related cash outflows in fiscal 2021. When including an additional non-recurring headwind associated with the payment of 2020 related UK VAT tax payments in the current quarter, we expect a total of approximately $150 million of one-time cash outflows in fiscal year 2021. We will update these estimates to include PA consulting after we close the transaction. Now on to cash generation and the balance sheet on slide 12. During the first quarter, we generated $96 million in reported free cash flow, a significant improvement versus the level seen in the last several Q1 periods, primarily a result of an improvement of three days in DSO versus a year ago. other working capital benefits, and less headwinds from cash restructuring. The strong Q1 cash flow included a net negative of $44 million of one-time costs associated with Focus 2020 restructuring and other items. Regarding the balance sheet, we ended the quarter with cash of approximately $837 million and a gross debt of $1.8 billion, resulting in $1 billion of net debt before attributing the benefit of the Worldway and C3 AI equities. Trading the Worley and C3AAI equity as cash or performing net debt to expected adjusted 2021 EBITDA is approximately 0.4 times, a clear indication of the strength of our balance sheet. During our current fiscal second quarter, we finalized a new delayed draw term loan related to our PA consulting investment. Post-PA close, we expect our balance sheet to have continued financial flexibility. However, we will be prudent to deploy excess cash toward debt repayment over the short term. And finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 11% earlier this year to 21 cents per share. Now I'll turn it back over to Steve for slide number 13.

Thanks, Kevin. Now let me review our total company outlook for fiscal 2021. Given our strong start to the fiscal year, we're raising the low end of our previous guidance ranges. We now expect adjusted EBITDA outlook to be a range of 1.075 billion to 1.155 billion versus our previous outlooks of 1.055 billion to 1.155 billion. And we expect adjusted EPS to now be in a range of $5.30 to $6 versus our previous outlook of $5.20 to $6. It is important to note that our guidance does not include any benefit from the PA consulting investment, which we expect to close by the end of fiscal second quarter. Looking beyond fiscal 2021, we continue to expect double digit adjusted EBITDA growth as we benefit from our focus 2023 initiative, as well as potential infrastructure related stimulus and a strong alignment to a diverse set of large secular growth opportunities. Operator will now open the call for questions.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. In the interest of time, please limit yourself to one question. If you have follow-up questions, please press star one again to rejoin the queue. Our first question comes from Joseph Donardi with Stifel. Your line is now open.

Thanks. Good morning. Bob, you talked a little bit about the Nango launch. Can you just speak to kind of what that now allows you to do in order to maybe more effectively market and sell that capability? And then can you just update us on the pipeline of opportunities related to that technology across the government to the extent you can?

Sure, Joe. So on the first, yeah, we're really excited about what Mango 1 brings to us. So it's a heavy payload, low Earth orbit satellite that's ours. And we invested in this, and it's now in space gathering data. It is kind of a right of entry to some of the higher end, both intelligence agencies as well as other application platforms. And it's going to put us in a really unique position for some of the, not only ongoing pursuits, but even for offerings that come in the future. So I'd say that, you know, the programs and projects that we've talked about, Project M and all kinds of other tropical fruits that we refer to these programs by, it puts us in a very much differentiated position to further strengthen our win ratio. There's only a few that have this.

Our next question comes from Jamie Cook with Credit Suisse. Your line is now open.

Hi. Good morning. Nice quarter. I guess my first question, you know, relates to the strong margin performance that you saw in PP&S. So I'm just wondering, you know, how much of that is sort of project mix versus potential, you know, short-term lower discretionary costs, how sustainable that is. And then I guess my longer-term question is, you know, while the margins in CMS are improving, there's still a big gap between CMS and P&PS. I'm just wondering, you know, over what time can the gap between the two-segment margins narrow more? Thank you.

So, Steve, you want me to take that?

Yeah, go ahead, Kevin.

Yeah, look, Jamie, thanks for the question. First thing is on the P&PS margin profile, we actually saw good solid gross margin performance, but really the fundamental margin profile driven primarily by the very discipline management of our G&A costs. Of course, some of that has been driven already by some of the work that we did When we announced some of the activities relative to our reduction in footprint on real estate, some of the travel reductions that we've been doing. But there's also been a fairly significant actions, proactive actions taken in terms of managing our labor costs appropriately relative to the current situation regarding the pandemic. uh we're closely monitoring that and as we think about how our business starts to come back which is fully anticipated over the course of this year some of those costs will come back into into play as it relates to to the business but that's going to be associated with higher gross profit as well so ultimately margin profile will continue to be robust maybe not at the same level as Q1, but certainly well above what we would have expected to see in 2020, what we did see in 2020. So feeling very good about that opportunity. In terms of the margin profile between the two businesses, we've said that we believe actually margin profile can improve on both sides with both of the businesses. And consequently, a big focus in 2021 is starting to reduce in a more tangible way the margin profile between the two businesses, and we've been communicating that CMS margins should be strong improvement this year. And I think we started to see that in the first quarter, and we would expect that to continue to play out over the balance of 2021.

Our next question comes from Josh Sullivan with the Benchmark Company. Your line is now open.

Hey, good morning. Good morning. Good job. Just a question on the free cash generation, and congratulations on moving the needle there. You know, just to the comments before about, you know, kind of the Nick shift moving around, I mean, is there anything we should be thinking about? You know, you've done well on the VSOs. I mean, is there anything that we should be thinking about as far as the free cash flow profile, you know, while you do that Nick shift up to kind of more high-value work?

In general, I would say that the opportunity for us to continue to drive DSO improvements from existing levels, we believe this remains an opportunity. It's tough work, as I've always said, relative to the ability to continue to drive that number down. Very pleased with the work in Q4 of last year. very pleased with where we ended Q1 of fiscal 2021, and we believe that there's an opportunity to continue to drive that down and that our mix of projects won't necessarily ultimately result in that underlying trend longer term. So we still feel good about that, still got a lot of work to do, but we feel good about the cash flow generative nature of the portfolio going forward.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

Yes, hi. Good morning, everyone. Good morning. Steve, I'm wondering if you could talk about your M&A pipeline as it spans today, you know, considering the cost reduction efforts and, you know, the upcoming integration with PA Consulting. How active are you folks in terms of scouting for opportunities? at this point and, you know, based on the lean work that you're doing, does that expand the opportunity set in terms of the cost reduction opportunities you might have as you look at the next set of companies in the pipeline, whether it's, you know, 21, 22 event? Can you just flash it out for us, please? Thanks. Right.

So, you know, we are a company that is always active and making sure we're exploring all opportunities globally. and we're going to continue to do that. We have recently executed on some acquisitions with the Buffalo Group and PA Consulting most recently, and Wood Nuclear is fairly new. So for us, our top priority is to execute on those recent acquisitions and demonstrate continued success. We feel proud of what we achieved with the major one of CH2M back in 2017 and and have successfully executed and exceeded expectations. And so we want to focus on that right now. As I mentioned in my remarks, you know, over the next months, our primary capital deployment is going to be to pay down debt. However, you know, when we look at the pipeline of opportunities and our strategy, you know there are several bolt-on opportunities even within pa consulting when we think about what we have initiated there you know we're coming together with da they've been a very successful firm and doing bolt-on acquisitions that's helped them create value and we want to continue to support that and And together, we think that there's going to be some real interesting things that we can do in that whole consulting arena, which is higher margin, higher value business. And then, of course, anything that we can do to just accelerate our digital modernization, strategic data utilization, as we have done. you know, with the series of cyber acquisitions, including most recently P.W. and the Buffalo Group. And so we'll continue to be active on the government services space and any other bolt-on acquisitions that can strengthen our P&PS business as well. And, you know, the final thing I'll say is there's some geographic expansion opportunities when you look at our mix of business. you know, it really is still majority, you know, the majority of our revenue comes from the U.S. and U.K., and then it drops down significantly from there. And so we think there's some great geographic expansion initiatives over the coming years.

Our next question comes from Andy Capitalist with Citigroup. Your line is now open.

Hey, good morning, guys. Morning, Andy. Good morning. And just trying to get a read on PNPS, given the lower revenue burn but strong backlog, Bob, you talked about still seeing some funding in COVID-related uncertainty out there, but the trends you mentioned, especially more focused on climate change, digitization, stimulus. seem to be overwhelming that uncertainty, at least in backlog. So maybe give us more color. What was the biggest driver of backlog growth in Q1? And especially if we do see some U.S. stimulus here, is it possible that backlog growth continues at that high single-digit rate you saw or even accelerates from here?

Yeah, so maybe, Andy, I'll address that first and then go back to the year-on-year performance. We do. So the short answer is yes. The pipeline that we capitalized on in Q1 the dialogue in anticipation of stimulus continues with our clients. And so where we fit in that value chain, where we would be in the initial concept work, scoping, looking at what, you know, potential optionality are around and objectives of these infrastructure projects. I see those continuing as well as, you know, the opportunities we're seeing were driven by the pandemic, but in the healthcare and in the uh in in this in the uh data center and semiconductor manufacturing world so so i think those those remain strong as far as um what we see coming out of the of the funding i'd really i'm sorry the year-on-year piece i'd really kind of point to um the sustainability of of uh of of our work due to the um you know the the framework and the position we have with our clients So yes, there has been a bit of a revenue decline, but it wasn't a drop off the cliff. And we were able to, there was a bit of a drop in Q3 of last year, and we've been able to sustain it. Remember, comparison to last year, quarter on quarter, I'm sorry, year on year, we weren't in the pandemic. And so I think that flatness is what we're seeing as far as the revenue piece and looking for that to turn around as the backlog converts.

Our next question comes from Stephen Fisher with UBS. Your line is now open.

Great. Thanks. Good morning, guys. Can you just talk a little bit about the increase in restructuring from, I think, 80 million to 100 million planned for the year? Why did it increase? What's the cadence from here? I think it'll certainly be a milestone when restructuring generally becomes immaterial, but I'm just wondering if maybe that's as long as there's going to be some M&A activity, should there be some ongoing restructuring?

Yeah, thanks. Appreciate the question. Look, on the number going from the 80 to the 100, that's effectively driven by the AWE item that is an on-cash charge. We highlighted that that there was a current evaluation that was occurring during our Q4 call, you might recall. And so we basically had to write down our AWE investment that was made several years ago. So no real difference in terms of restructuring. Of course, we have not yet included any of the dynamics associated with PA, and there will be some costs obviously there. And that will be further clarified after we actually have PA come on into the fold, hopefully expected by the end of this quarter. So no real fundamental change at this particular point in time other than the AWE charge, non-cash charge.

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

Hi, good morning, guys. Good morning, Chad. Good morning. So within your greater than $30 billion project pipeline, I think there are a couple of large projects you guys talked about in the past on the weapons of statement and ISR side. Can you give us your latest thoughts on just quick award timing, if there's been any change in competitive landscape, your positioning? And then also, can you talk about just like a level of design activity that you're seeing globally within like your private PPS business? You know, where are you seeing accelerating growth, you know, versus maybe some, you know, stall in the recovery? Thanks.

Joe, maybe I'll start here and Bob chime in. And I'll start on the latter, you know, when we talk about the PNPS business, clearly what's driving our pipeline are the things that bob talked about initially and that is you know the whole digital modernization and strategic data utilization across the you know all of our clients and and uh buildings infrastructure advanced facilities uh the whole climate change arena is clearly going to be ramping up you know with the change of administration in the u.s but just the global priority that's going on there and you know when we talk about climate change it's the things we're already doing in solar and wind and now hydrogen is kicking in and the energy storage with batteries and the whole resiliency strength that we have, which we've been doing for the last several years around flooding and sea level rise and a whole host of other things, PFAS, et cetera. And then the whole opportunity around the advanced facilities business with regard to what the pandemic has accelerated in the life sciences business and the electronics business. Because on the life science side, there's now a pent-up demand on non-COVID activity. Obviously, the priority is COVID vaccines and therapeutics, but oncology, diabetes, emerging cell and gene therapy, and also the fact that there's more need for capacity. So there's a huge contract toll manufacturing opportunity that's now presenting itself And then the whole healthcare side with hospitals and what's going on globally there. And then the electronics with the future of work with everything from 5G, the data centers to the semiconductor, there's clearly a wave of growth in that business as well. And then on top of all that is what countries are doing around the world, starting with the US around stimulating their economies coming out of the pandemic. um you know clearly we're seeing positive momentum in the us um you know we expect to you know see something soon with with this first covered relief package but but we're anxious to see what comes out over the coming months you know in the whole infrastructure stimulus which will benefit jacobs it's upside you know this is 22 and beyond when we talk about infrastructure stimulus it's our current year is not dependent on it and And then from a standpoint of UK, very positive momentum. And many of the other countries are also kicking in with their infrastructure initiatives, economic initiatives. So real positive momentum on the PNP outside. Bob, you want to comment on the backlog

Within the next 12 months, I think I've mentioned that $10 billion is in source selection. Specifically around, I think the question was around ISR, and I'll tack on cyber to that. Now with the Buffalo Group and with kind of our positioning in that space now, both in cyber as well as intelligence, whether it be the intelligence commands or defense and even the joint commands, the COCOMs, we're now in a majority of them with increased skill sets across multi-domain. So we see those awards coming in. They might not be as large and longer in duration. These jobs traditionally are now in the current form aren't. But we see those continue to flow in from Q3 and beyond. with higher margins.

Our next question comes from Louis De Palma with William Blair. Your line is open.

Great. Steve, Kevin, Bob, and John, good morning. Good morning. Good morning. There has been a surge in investor interest for space exploration and space reconnaissance. Are you able to quantify the size of Jacobs space portfolio as it relates to NASA, the intelligence community, and the Missile Defense Agency. And on this note, can you review what role Jacobs is expected to play for the Artemis Moon program? Thanks.

Yes, space is, you know, has been a legacy strength and an important part of our revenue going back to the the long history we have with NASA, where we're NASA's leading solutions provider across, you know, essentially all of their sites. And so, you know, that's our foundation. And then with the KW acquisition and some of the other initiatives that we've done both organically and bolted on is that this whole low-Earth orbit space intelligence that, you know, Bob just talked about, that we're very excited about most of the very highly classified work So that's now going to, we believe, is going to be a very high growth add-on to our whole space initiative. And then with the adjacency work that comes with Our intelligence work and relationship with the space community is the whole hypersonics area that is going to be something that is big for us, starting in sort of the consulting research development and then getting into some of the big programs there. So well over a billion dollars today and one that we expect a high growth lot going forward.

Our next question comes from Sean Eastman with KeyBank Capital Markets. Your line is now open.

Hi, team. Nice start to the year. I'm just curious. You know, a lot of companies are talking about digital data. I'm just curious, you know, as we think about Focus 23, You know, what do you think Jacobs is doing better than the competition as we think about digital and data, you know, effectively moving the company up the value chain?

Well, let me start with, you know, kind of how we've gotten to where we are because, you know, Jacobs has always been a company that has been working on digital smart initiatives, you know, going back to the work that we've done with NASA and others. But when you look at the last several years, the CH2M acquisition was a combination that has really accelerated our capability. The things that CH2M brought like digital twins that we talk about and several other patented capabilities. And then we go into the whole strategy that we unleashed over the last several years. around you know the jacobs connected enterprise and now the you know taking it to a to a higher level in the culture that we put in the talent attraction uh that we've had a very focused talent attraction on making sure that we bring in all the subject matter expertise and the digital capabilities uh just just it's been impressive and and you know really tapping into the the uh some of the most innovative companies to bring some of that talent to jacobs And then the last two big steps have been the rebranding to really make our clients more aware. A lot of the stuff we were doing for certain clients in one part of Jacobs, most of the rest of our clients didn't really know that we had that capability. And that brand initiative that we launched last year was a key step. And then PA consulting is now going to take it to a whole new level around the end-to-end solutions that we can provide. You know, when you look at the IP that we have, it's, you know, it's pretty impressive across the board. And then, you know, the technology hubs that we focus on, geospatial, predictive analytics, cyber, Internet of Things, intelligent asset management. And when you put it all together, the real differentiation for Jacobs is that, you know, we have both the domain knowledge, decades of experience working on all of these end markets and clients. And we have the state-of-the-art technology skill set in bringing digital solutions. And when you put that together, we feel like we're in a unique, differentiated position.

Our next question comes from Michael Dudas with Oracle Research. Your line is now open.

Good morning, gentlemen. Maybe this one for Kevin. wondering if they have any more 20 baggers in that asset portfolio of yours. Appreciate to know that. But more seriously, could you remind us, when PA closes, what the balance sheet metrics on net debt, cash, leverage ratios, and how you're thinking about the current ownership of Worley and C3AI relative to your leveraging opportunities or your cash needs going forward?

Thanks, Mike, for the question. I think with a lot of the work that Steve just alluded to in our strategy over the last several years has positioned us very, very well. from a balance sheet perspective to be able to execute against the PA transaction. Our actual net debt is probably in the neighborhood, once we close, is probably in the area of two times. So still quite nice in terms of our position. We still have substantive levels of cash at that particular point in time. So So we have some flexibility as it relates to that. Our gross debt levels will be a little bit higher. So our idea is that we will kind of in the very short term reduce some of that gross debt level with incremental cash generation that we're going to be seeing. But we feel like we still have really good flexibility as it relates to how we will look to deploy capital, not in an necessarily immediate term, but certainly as we progress through the next few months and into later 2021. we'll be able to have some greater levels of flexibility there. So really quite well positioned relative to our debt structure, even after the amount of funds that are going to be paid out. It's approximately about $1.8 billion. So we'll be doing well even with that in terms of our leverage factors. Relative to the other equity matters, we said that these are good strategic investments and that we'll continue to think about what that means longer term.

Our next question comes from Michael Fenninger with Bank of America. Your line is now open. Thank you.

Yeah, thanks for squeezing me in. I'm just curious on your mix and the growth prospects going forward. Basically, over the next two, three years, do you feel like more of your growth is coming from PPS with the infrastructure, environmental, and advanced facilities, or is it mostly coming from CMS? And lastly, just to be clear, do you need a big infrastructure package to pass to reach your double-digit growth uh objectives in 2020 is that is that critical to hit that that 2020 and beyond target you guys laid out thank you so you want me to uh go guys first yeah go ahead yeah look um

The guidance that we've provided doesn't assume anything as it relates to a major infrastructure. There certainly seems to be some incremental momentum there. And our view, however, is that we will start to see an ability to start to see incremental momentum in the back half of 2021. And certainly the sustainability comment that Bob had made is important because of the the particular stimulus package that's being considered right now provides that opportunity to do so. I think if you combine it all together with Focus 2023 and our continued efforts to drive effectiveness across the globe and with the continuation of an improving economic picture, we still think there is an ability to have great growth in 2022 and beyond, and that would be double-digit. Obviously, if there is a large infrastructure bill, that would be augmenting some of those numbers. I think as it relates to both CMS and P&PS, we feel good about the growth prospects of both of the business long-term. Both are aligned with really strong growth trends, critical mission areas as outlined by Bob, and then, of course, people and places aligned with secular long-term growth trends. So we feel pretty good about the growth algorithm that's facing us in terms of both of the businesses.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. My next question comes from Gautam Tanna with Cowan. Your line is now open.

Yeah, hey, guys. This is Dan. I'm for Gautam. Thanks for taking the question. Just a quick one here. Do you have the CMS look-to-bill number excluding the acquired backlog from Buffalo?

Yeah, it's about a little over 1, 1.05, 1.06. to include wood. OK.

There are no further questions.

It's one time even without wood.

Yeah, and it's over one even without wood. I'm sorry.

There are no further questions in queue at this time. I'll turn the call over to Steve Dimitrio for any closing comments.

All right, thank you. You know, in conclusion, our Jacobs people drive our performance, and this year more than ever, their commitment, creativity, and perseverance was our differentiator. We've chosen to honor their spirit in our integrated annual report for 2020, which we launched two weeks ago. I encourage you to visit the investor page of our website to read the report and explore some of their stories of accomplishment for our clients and our communities, and then furthering our strong culture. Thank you.

This concludes today's conference call. You may now disconnect.