雅各布工程 (J) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Jacobs Fiscal First Quarter 2021 Earnings Conference Call and Webcast. (Operator Instructions) 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 2 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 2 for more information on the calculation of these pro forma metrics. The 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.

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; and President and Chief Financial Officer, Kevin Berryman. Steve will begin by updating the progress we are 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 and 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 Demetriou, Chair and CEO.

Thanks, Jon. 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 and their production and distribution of critical vaccines.

Turning to Slide 4 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 3 key tenets.

First, we have transformed our culture aligned -- around a common purpose of creating a connected, sustainable world, underpinned by strong values. But 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 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 towards 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 4, 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 U.K., 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 U.K.'s Department of International Trade (sic) [U.K.'s Department for International Trade], advising on Project Defend and U.K.'s 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 U.K. 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 5. 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 PlanBeyond and our Climate Action Plan launched last year. I'm pleased to report that we achieved a net 0 carbon, including 100% renewable energy for our operations in 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, Jacobs 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 and 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 6. At Jacobs, we intend to lead from the front in the transformation to a net 0 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 Jacobs 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 0 economy.

With that, I'll turn the call over to Bob Pragada to provide more detail by line of business.

Thank you, Steve. And now moving on to Slide 7 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 continued 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 hyper speed and scale. Data is considered a strategic asset similar to the priority given to weapon systems. And it is increasingly central to war fighter 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 (sic) [IDIQ] 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 satellite. 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 Mango One 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 through its decades of supporting the Air Force and NASA, the clear leader in hypersonic solution. 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 run time capability.

A final trend is to discuss cyber. The recent solar wind sunburst advanced persistent attack continues to make headlines giving its 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 GBP 16.5 billion or 10% per year over the next 4 years in defense areas, including cybersecurity.

CMS' 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 Agency and Combatant Command.

In summary, we continue to see strong structural demand 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 8. I'll discuss our People & 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 strategy, timing remains uncertain in our focused geographies, such as in the U.S. and U.K. We anticipate further improvement to our pipeline as governments solidify their budget.

I'll discuss 4 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 stimulus for long-term job growth and economic relief; third, the pandemic, and continued growth in health, life sciences and cloud computing; and fourth, 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 commitment 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 had a program manager to Expo 2020 Dubai, the sustainability pavilion, known as Terra, premiers this month. Leveraging our industry-leading sustainability expertise, Terra is designed to be a net 0 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 modernization. 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 U.K., 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 chain. 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 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 health care prices.

We were selected to lead the programming and engineering efforts for a new campus for the California -- 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 and 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 Katy bus rapid transit system as well as the new rapid transit project in Southeast Asia that will enable the workforce to adapt to 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 Virgenes 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 9. First quarter gross revenue increased 1% year-over-year, with pro forma net revenue flat. Revenue for CMS increased 3% on a pro forma basis, and P&PS net revenue was down 3%. The P&PS decline was mainly attributed to slower revenue burn, although the outlook for the business remains strong with backlog up 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 2 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.

CMS 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 margin 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 impacts. As it pertains to G&A, the first quarter continued to benefit from our ability to proactively manage our cost structure, the CMS mix benefit previously stated, and some Focus 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%, up 60 basis points year-over-year on a reported basis.

GAAP net earnings and EPS from continuing operations were $257 million and $1.96 per share, and included a benefit of $0.54 driven by mark-to-market adjustments for our Worley equity stake; a $0.47 benefit related to a mark-to-market investment in AI software provider, C3.ai; $0.16 per share of after-tax charges, primarily related to Focus 2023 and other restructuring costs; a $0.17 charge related to the impairment of our AWE Management investment; and amortization of acquired intangibles of $0.13. 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 20x 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 1.2x for Q1, driven by strong book-to-bill in P&PS.

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 P&PS 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 pro forma basis. CMS operating profit was $110 million, up 22% and up 15% year-over-year on a pro forma 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 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 1-year anniversary of the Wood Nuclear acquisition and continue to ramp new wins, more than offsetting the revenue headwind from fully transitioning of 2 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 P&PS. 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 1.3x book-to-bill. We continue to see solid revenue growth in our Americas business, offset by some timing-related slowdown in our advanced facilities 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 up 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 nonallocated 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 in 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 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 $0.08 to $0.10 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 are also optimistic about their calendar year 2021 growth plan. And after the transaction closes later this quarter, we look forward to discussing the results and growth plan in more detail. We continue to expect $0.52 to $0.57 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 nonrecurring headwind associated with the payment of 2020 related U.K. VAT tax payments in the current quarter, we expect a total of approximately $150 million of onetime 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 3 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 onetime costs associated with Focus 2023 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 Worley and C3.ai equity. Treating the Worley and C3.ai equity as cash, our pro forma net debt to expected adjusted 2021 EBITDA is approximately 0.4x, 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 $0.21 per share.

Now I'll turn it back over to Steve for Slide #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 our strong alignment to a diverse set of large secular growth opportunities.

Operator, we'll now open the call for questions.

(Operator Instructions) Our first question comes from Joseph DeNardi with Stifel.

Rob, you talked a little bit about the Mango 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, we're really excited about what Mango One 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 the programs, the 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 it.

Our next question comes from Jamie Cook with Credit Suisse.

I guess my first question relates to the strong margin performance that you saw in PP&S (sic) [P&PS]. I'm just wondering how much of that is sort of project mix versus potential short-term lower discretionary costs, how sustainable that is? And then I guess my longer-term question is, while the margins in CMS are improving, there's still a big gap between CMS and P&PS. I'm just wondering over what time can the gap between the 2 segment margins narrow more.

So Steve, do you want me to take that?

Sure. Go ahead, Kevin.

Yes. Look, Jamie, thanks for the question. First thing is, on the P&PS margin profile, we actually saw a good solid gross margin performance, but really, the fundamental margin profile driven primarily by the very disciplined 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.

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 play as it relates 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 2 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 difference between the 2 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 that to continue to play out over the balance of 2021.

Our next question comes from Josh Sullivan with The Benchmark Company.

Just a question on the free cash generation, and congratulations on moving the needle there. Just to the comments before about kind of the mix shift moving around. I mean is there anything we should be thinking about -- you've done well in the DSOs. I mean is there anything that we should be thinking about as far as the free cash flow profile while you do that mix 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, in 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.

Steve, I'm wondering if you could talk about your M&A pipeline as it stands today, considering the cost reduction efforts and the upcoming integration with PA Consulting. How active are you folks in terms of scouting for opportunities at this point? And 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 a '21, '22 event? Can you just flesh it out for us, please?

Right. So 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 a major one of CH2M back in 2017 and have successfully executed and exceeded expectations. And so we want to focus on that right now. As I mentioned in my remarks, over the next months, our primary capital deployment is going to be to pay down debt.

However, when we look at the pipeline of opportunities and our strategy, there are several bolt-on opportunities, even within PA Consulting. When we think about what we have initiated there with coming together with PA, they've been a very successful firm in doing bolt-on acquisitions that's helped them create value, and we want to continue to support that. 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 with the series of cyber acquisitions, including most recently, KeyW 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 the final thing I'll say is there's some geographic expansion opportunities when you look at our mix of business. It really is still majority, 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 Kaplowitz with Citigroup.

In just trying to get a read on P&PS given the lower revenue burn but strong backlog. Bob, you talked about still seeing some funding and 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 you can 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 the backlog growth continues at that high single-digit rate you saw or even accelerates from here?

Yes. 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 sit in that value chain, where we would be in the initial concept work, scoping, looking at what potential optionality are around end objectives [will be] infrastructure projects. I see those continuing as well as the opportunities that we're seeing driven by the pandemic but in the health care and in the data center and semiconductor manufacturing world. So I think those remain strong.

As far as what we see coming out of the funding, I really -- I'm sorry, the year-on-year piece. I'd really kind of point to the sustainability of our work due to 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 a 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 to see -- looking for that to turn around as the backlog converts.

Our next question comes from Steven Fisher with UBS.

Great. Can you just talk a little bit about the increase in restructuring from, I think, it was $80 million to $100 million planned for the year? Why did it increase? Kind of what's the cadence from here? I think it will 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.

Yes. Thanks. Appreciate the question. Look, on the number going from the $80 million to the $100 million, that's effectively driven by the AWE item that is a noncash charge. We highlighted 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, noncash charge.

Our next question comes from Chad Dillard with Bernstein.

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 sustainment and the ISR side. Can you give us your latest thoughts on just the 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 P&PS business? Where are you seeing accelerating growth versus maybe some stall in the recovery?

Chad, maybe I'll start here. And Bob, chime in. And I'll start on the latter. When we talked about the P&PS business, clearly, what's driving our pipeline are the things that Bob talked about initially. And that is the whole digital modernization and strategic data utilization across the -- all of our clients and buildings, infrastructure, advanced facilities. The whole climate change arena is clearly going to be ramping up with the change in administration in the U.S., but just a global priority that's going on there.

And 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 health care side with hospitals and what's going on globally there.

And then the electronics with the future of work, with everything from 5G to data centers to semiconductor, there's clearly a wave of growth in that business as well. So -- and then on top of all that is what countries are doing around the world, starting with the U.S. around stimulating their economies coming out of the pandemic. Clearly, we're seeing positive momentum in the U.S. We expect to see something soon with this first COVID relief package. But we're anxious to see what comes out over the coming months in the whole infrastructure stimulus, which will benefit Jacobs, its upside. This is '22 and beyond when we talk about infrastructure stimulus. It's -- our current year is not dependent on it. And then from a standpoint of U.K., 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 P&PS side.

Bob, do you want to comment on the backlog on CMS?

Yes. We're -- 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 the 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 command, the COCOMs com, we're now in the majority of them. We have increased skill sets across multi domains. So we see those awards coming in. There might not be as large and longer in duration, these jobs traditionally now in the current form aren't, but we see those continue to flow in from Q3 and beyond with higher margin.

Our next question comes from Louie DiPalma with William Blair.

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?

Yes. Space has been a legacy strength and an important part of our revenue going back to the long history we have with NASA, where we're NASA's leading solutions provider across essentially all of their sites. And so that's our foundation. And then with the KeyW acquisition, and some of the other initiatives that we've done both organically and bolted on, is that this whole lower orbit space intelligence that Bob just talked about that we're very excited about, most of it, 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.

So -- 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 the sort of the consulting, research development and then getting into some of the big programs there. So well over $1 billion today and one that we expect high-growth block going forward.

Our next question comes from Sean Eastman with KeyBanc Capital Markets.

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

Well, let me start with kind of how we've gotten to where we are, because Jacobs has always been a company that has been working on digital smart initiatives, 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 -- the combination has really accelerated our capability. The things that CH2M brought, like Digital Twins, that we talk about and several other packeted capabilities. And then we go into the whole strategy that we unleashed over the last several years around the Jacobs Connected Enterprise and now the -- taking it to a higher level and the culture that we put in. The talent attraction 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, it's been impressive and really tapping into the -- some of the most innovative companies to bring some of their talent to Jacobs.

And then the last 2 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 have 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.

When you look at the IP that we have, it's pretty impressive across the board. And then 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 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 and bringing digital solutions. So when you put that together, we feel like we're in a unique differentiated position.

Our next question comes from Michael Dudas with Vertical Research.

Maybe this one for Kevin. One, wondering, do you 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 C3.ai relative to your deleveraging 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 and 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 2x. So still quite nice in terms of our position. We still have substantive levels of cash at that particular point in time. 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 the 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 appropriately -- 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 Feniger with Bank of America.

I'm just curious on your mix and the growth prospects going forward. Basically over the next 2, 3 years, do you feel like more of your growth is coming from P&PS 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 objectives in 2020? Is that critical to hit that 2020 and beyond target you guys laid out?

So you want me to go, guys, first?

Yes, go ahead, Kev.

Yes. Look, 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 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 build, that would be augmenting some of those numbers.

I think as it relates to both CMS and PPS with -- 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 & 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.

(Operator Instructions) Our next question comes from Gautam Khanna with Cowen.

This is Dan on for Gautam. Just a quick one here. Do you have the CMS book-to-bill number excluding the acquired backlog from Buffalo?

Yes. It's about a little over 1.

It is 1x even without Wood.

Yes. And it's over 1 even without Wood. I'm sorry.

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

All right. Thank you. 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 2 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 in furthering our strong culture. Thank you.

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